The evolution of reverse mortgage products, specifically the HECM, seems to have been stalled by the limited applicability and utility of the product in the broader perspective of retirement planning. A major cause of this stall can be attributed to an overreaction to a very limited but very problematic issue of HECM borrowers being coerced into using reverse mortgage proceeds to buy inappropriate financial products.
Reverse mortgages have long been portrayed as a solution for house rich but cash poor seniors to have access to additional money to fund their retirement. Detractors and those with limited understanding of the product continue to review its utility as solely a product of last resort, stating that seniors should only turn to their home’s equity when there are no other options available. The enhanced negative perception of cross-selling financial products in concert with HECM proceeds has clouded the positive potential of the reverse mortgage to leverage financial security and be prepared for life events associated with aging when incorporated as part of a larger plan.
The issue of how reverse mortgage proceeds are utilized came to the forefront of government attention when a couple of highly publicized cases highlighted how seniors were coerced into buying inappropriate long-term annuities that tied up the money for monthly distributions and put the undistributed funds at risk of loss upon the death of the borrower. Unfortunately, much of the media coverage portrayed that the risk to the senior was a direct result of the reverse mortgage instead of the financial product that was purchased from the proceeds.
The problem was exacerbated by several organizations that were either directly cross-selling the reverse mortgage and annuity product, or had originators who were referring clients to insurance salespeople who placed clients in these products. The products came with high commissions, but low applicability to the borrower. One could argue that the products guaranteed a monthly stream of income for the clients for as long as 30 years, but the individuals who purchased the products had no way to access the undistributed funds once the product was purchased, and those undistributed funds were lost when the senior passed away. These examples created a perception that seniors were being victimized by a conspiracy between HECM originators and annuity salespeople for the sole purpose of maximizing revenue without necessary consideration for the seniors needs.
The result led to regulations stemming from the Housing and Economic Recovery Act of 2008 (HERA), which forbid originators or any party associated with the origination of FHA-insured HECMs from being associated with the sale of any other financial products. Similar state laws followed suit, including the recently passed AB 793, which prohibits insurance agents and brokers from employing or making referrals to an individual involved in the sale of reverse mortgages.
The concept of a positive interaction between being able to access the home equity in a manner that creates a low level of risk to a borrower who is willing and able to maintain their obligations, and use that equity to purchase other financial and insurance products that can provide security and stability, has been essentially wiped out by the flood of regulatory restrictions. As government officials continue to vilify the concept of cross selling and stoke fear in order to drive media attention to their efforts to defend seniors, the number of older Americans that could improve their quality of life and security is compacted. By applying an atom bomb to the small number of abuses that occurred in relation to cross selling, the government response has destroyed the HECM’s place as a product of great versatility designed to meet a wide range of borrower needs.
The problem, of course, has been heightened by the prevalence of the fixed HECM product. While a fixed interest rate is preferable to the vast majority of seniors, the lump sum distribution is not the ideal solution to this same majority. However, in isolation, the product that provides the highest level of benefit (i.e., the most cash) to the borrower, is generally perceived to be the best option by both borrower and originator. Somewhere in the mix of all this, the concept of meaningful solutions gave way to the simplest of solutions. Without detailed financial advice and support, many seniors are not armed with the knowledge of how to manage a large lump sum of money. This creates a significant risk to the longevity of the funds and opens the seniors to more potential for financial fraud.
Whether they realize it or not, the wall between HECM originators and other financial professionals has caused many originators to limit their focus to a small subset of the larger senior population: those with a specific and immediate need for the product. They seek out the prospect who is struggling under the weight of their current mortgage or have monthly cash flow problems. Although this is one of the more important utilities of the product, and the arena that has the most immediate impact for borrowers, it is just one of many potential utilities available from the product.
Due to the firewall that regulations have endeavored to build between reverse mortgages and any other financial or insurance product that may benefit seniors, many originators shy away from the idea of even mentioning that there may be positive benefits for seniors to separate the equity in their home and apply it to extend other retirement assets, or prepare for life change events (such as long-term care insurance) that enhance the ability to age in place. In an article in Investment News in January of this year, a financial planner laid out a simple case in which incorporating a reverse mortgage in a retirement plan could significantly extend the longevity of retirement assets. The simple example considered the impacts of supplementing monthly income from a reverse mortgage via a monthly payment or draws on the line-of-credit, without weighing the potential of reinvestments of a lump sum distribution.
A truly comprehensive retirement and aging plan requires that different professionals from the financial, insurance and health care fields are able to work in conjunction to provide the highest level of security and comfort for the client in the latter period of their life. It requires a holistic examination of all available resources and assets, along with a complete inventory of the client’s preferences for standard of living and health care needs, both expected and unexpected. Only from this broader vantage point can the full versatility of the reverse mortgage be discovered.
When the discussion of reverse mortgages only includes the reverse mortgage itself, it is easy to zone in on the common perceived threat of consuming all the equity without reasonable consideration of the benefits provided. However, when the discussion includes a more comprehensive view that considers how the proceeds could provide greater options within a wide-ranging plan, then the potential importance of collaboration between the different professional service providers is highlighted. From this perspective, regulations that seek to protect seniors should encourage seniors’ advisors in different professional service areas to work together to devise the best possible plan to meet their needs, rather than strive to bar these professionals from interacting.
Financing aging is an increasing issue in the United States. As the baby boomers age and Social Security and Medicare continue to be financially stressed, it seems commonsense that lawmakers would focus on alternatives available to fund aging from every resource – and would place increased fiduciary responsibility on financial professionals to find coordinated and comprehensive planning options to provide seniors with security and stability in their later years.