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Reversing the Negative View of Reverse Mortgages

The Consumer Financial Protection Bureau (CFPB), an agency created under the Dodd-Frank legislation (and whose creation I applaud), recently released a report on reverse mortgages. The report is quite negative — in my view, excessively negative — and the press summaries omit many of the nuances of the original document, which makes it sound even more negative than it is. Reverse mortgages, which allow homeowners to tap their home equity, are instruments that many Americans are going to need in order to have any chance of a decent retirement.  To the extent that flaws exist in the reverse mortgage market, they need to be fixed. But a future without reverse mortgages would be a very grim one indeed. (Full disclosure: I am an investor in and a member of the Board of Directors of Longbridge, a start-up company that has been formed to provide reverse mortgages in a socially responsible fashion.)

Matthew Benoit /

Reverse mortgages are a special type of home loan for older Americans that allow them to borrow against their home and defer the repayment of the loan until they die or sell their home. The most important reverse mortgage currently on the market is the Home Equity Conversion Mortgage, or HECM, which is issued and insured by the Department of Housing and Urban Development (HUD). HECM loans are available to all homeowners age 62 and older who own their primary residence free and clear or who can pay off their mortgage easily with the proceeds of the loan. (In 2010, HUD introduced the HECM Saver, with lower upfront loan closing costs for homeowners who want to borrow smaller amounts.)

The maximum loan amount depends on three factors. The first is the value of the home; the higher the value (up to the Federal Housing Administration’s insurance limit of $625,000), the more can be borrowed. The second is the interest rate; interest payments are added to the principal over the life of the loan, so the lower the interest rate, the more can be borrowed. The third is the age of the borrower; since interest payments accrue over time, a shorter loan period means the amount an individual can borrow will be larger.

Borrowers can take their money in regular payments for a fixed term, can take regular payments for as long as they stay in their house, can get a line of credit, or can select some combination of these choices. They can also choose to receive the entire amount in one lump sum.

Americans are going to need reverse mortgages. Most households are going to find that their retirement incomes fall short of their retirement needs and will experience a decline in living standards. Being able to tap their home equity — often their single largest asset — provides a source of income that could supplement Social Security and the income generated by their meager 401(k) balances. To date, however, the reverse mortgage market is small; only about 2% to 3% of those eligible take out such a loan.

The CFPB identified three major concerns:

1.      The products are complex, and the existing tools and counseling do not enable consumers to make good decisions.

2.      Misleading advertising, spouses’ lack of knowledge about the transaction, and the failure to pay insurance and taxes creates risks for consumers.

3.      Recent trends toward taking out loans at younger ages and withdrawing more of the money upfront (often to pay off their traditional mortgage) put consumers at risk.

These concerns are legitimate, but manageable. The products are more complex than traditional mortgages and not suitable for everyone. Careful counseling is essential so that providers sell these products to appropriate people. Misleading advertising should be identified and stopped; spouses, even if not co-borrowers, should be provided with information and required to sign off on the transaction; and lenders should make sure that borrowers have enough to cover taxes and insurance by either lending only to those with some financial cushion or withholding enough to cover these payments. Taking reverse mortgages at younger ages, the final concern, may be a sensible strategy if used to pay off traditional mortgages, but not to gamble in the stock market. In either case, the lender should make sure the consumer has the required financial cushion before taking out a reverse mortgage.

The bottom line is that the reverse mortgage market should be fixed to the extent that it’s broken, but dismissing the product will doom many households to poverty in old age.


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    • With a couple of exceptions, these comments highlight the major problem with reverse mortgages and that is most people talk about them with zero to little understanding of the product or how it could be used.

      Go Google the name on the article and read her Wikipedia bio. Alicia Munnell is a Harvard PhD that is the Director of The Center for Retirement Reasearch @ Boston College (recognized by The New York Times as the nations leading center on retirement studies). That qualifies her as an authority by itself but she also was director of research for The Federal Reserve Bank of Boston.

      I am guessing she has a stable full of very competent PhD’s (like herself) that spend a lot of time doing very meticulous research before presenting an idea.

      Her opinions on reverse mortgages hit the bulls eye and if you
      have middle school math skills you can use the actuarial bias of this program and the FHA guarantees to turn your house into the best retirement planning tool of your retirement and they are as obvious as a Pink Elephant sitting in your living room.

      This program is a smart tool and there are some savvy ways to use it. Texas Tech Universities Personal Financial Planning Program just spent a year doing an exhaustive mathmatical study of this program and came away saying it was a Very Powerful Financial Planning tool. I agree and if you will put some more IQ into it (buy some if you need it)chances are you will too.

      I am not saying everyone should do this program but I am saying most of us should be learning the facts, then measuring/weighing this against our other options.

    • Second mortgage or home etuiqies do show, when recorded and this is the issue. I used to work for a title company for a major lender and issues do arise. Some lenders send the home equity to be recorded themselves, lenders don’t know all the variables that go into a recording, they miscaculate fees, don’t know about cover pages, maybe there’s a dual tax id and it costs more, some states only accept single sided mortgages. Maybe the county rejects the mortgage as the font is too small, the notary stamp bled through the paper, or there is no stamp or seal at all. If it’s rejected, the county sends it back to the lender, who most times thinks the mortgage is recorded until the borrower goes to refinance and the he is not on record so it takes them 6-8 weeks to go to their vault where they hold everything to either figure out the mortgage was not recorded or they don’t have it at all.I don’t know why people like home etuiqies, for some it’s a status thing ..I have a 500k home equity ..some need money quick and dont understand the full economic process and think home etuiqies are a good deal because the rate is low. Like any other mortgage product, home etuiqies have their usefullness, but it’s not for everyone or every situation

    • As others comment above, it is amazing how many people respond negatively to reverse mortgages without really understanding them. They may not be appropriate for everyone, but I suspect that they are not utilized as often as they should be.

      A few of the big benefits that I see from these programs that do not get nearly the amount of attention that they should:

      1. Heads You Win, Tails You Don’t Lose – in other words, if when you sell your home and the value has appreciated, you keep the gain; but, if the value of the home drops and is less than the outstanding loan balance, you owe nothing. The federal government, through HUD, guarantees this. I know of know other financial product that provides this type of opportunity to a homeowner.

      2. Government Backing – the guarantees associated with a reverse mortgage are backed by the US federal government, which should give homeowners confidence that these will be there when they need it.

      3. Guaranteed Increasing Line of Credit – under some reverse mortgage programs, you can get secure a line of credit that increases with interest regardless of the value of your home. These rate of growth can be very important when you consider the inflation associated with healthcare costs. I know of no other product that offers such a guarantee.

      4. Annuitization With A Clawback – reverse mortgages offer an option to take an annuity benefit that continues for your entire life, regardless of what the cumulative loan balance is. Further, you can switch from this option to a line of credit, so if you become ill and still have outstanding equity at your death your heirs still get to keep the home equity. Compare this to a conventional annuity, where the insurance company must keep the entire premium to use to fund those that live beyond their life expectancies.

      I strongly encourage anyone that has a significant portion of their wealth tied up in home equity to consider this option, as these features can be extremely valuable.

      If interested, I have written several blogs on retirement income planning that you can access here

    • I think Doris has offered one of the best comments in this discussion. She’s pointed out the pros and cons and accurately illustrated how a reversed mortgage has worked for her. Those who think reverse mortgages are a scam are, as Doris stated, being very short-sided. Reverse mortgages can and do work. Like most things in life, an educated consumer is a reverse mortgage’s best customer.

    • Doris, I read your post with interest and I agree ALL options should be considered. In my volunteer work with seniors I have seen far too many 85 yr old widows losing sleep over their food bills and electric bills, while living in a home they own out-right. What’s wrong with them getting a check every month (from a reverse mortgage) to give them peace of mind at that stage of their lives?

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.