As a faculty member of the University of Pennsylvania’s Wharton School of Business, Jack Guttentag spent nearly 40 years in academia researching financial markets and institutions, monetary policy, real estate finance, housing economics and mortgage instruments. But in 1998, as the Internet began to change the way people accessed information, Guttentag decided to shift his focus and direct his research toward consumers, launching a website called The Mortgage Professor (mtgprofessor.com) to help the general public better understand the various home loan products available to them. With a mission to provide “free and disinterested advice to consumers on mortgage-related issues,” The Mortgage Professor offers information on a variety of financial instruments, including reverse mortgages.

In his syndicated newspaper column, “Ask the Mortgage Professor,” Guttentag frequently fields questions about the reverse mortgage product, prompting him to stress the value of this loan as a unique tool for seniors looking to achieve financial security and remain in their homes. TRR sat down with Guttentag to hear his thoughts on the HECM program, including how pending FHA changes might improve the product and how to better educate consumers about the options afforded by this type of loan.

TRR: You dedicate an entire page on your website to reverse mortgages. Do you receive a substantial number of inquiries from consumers about the product?

JG: We get lots of questions. Most seniors are confused about how reverse mortgages work, which is not surprising because what they usually know about are standard mortgages, and reverse mortgages are very different. So they don’t come into the picture with any background or knowledge that would help them understand reverse mortgages. I hasten to add that their lack of understanding about reverse mortgages is not really the central problem. Most seniors don’t know how automobile engines work either, but that doesn’t prevent them from learning how to drive one. Seniors don’t need to understand how reverse mortgages work to use one effectively. What they need to understand is the various options that the program provides, the combinations of options available to them and how those options might be used to meet their needs. It also helps if they understand the ability under the program to shift from one option to another in the future as their needs change… The whole focus of the reverse mortgage section of the site is to provide an easy way for [consumers] to understand what their options are and how those options might help them. We are in the process of making a lot of changes to [the site] to make it even simpler and to provide ways to give people with a limited ability to follow the complexities the information they need to make a decision.

TRR: You’ve been an outspoken advocate for the use of a reverse mortgage under the right circumstances. Why do you find value in the product?

JG: There are millions of seniors who spend the last years of their lives impoverished and leave behind an asset with great market value to their heirs who often don’t need it. The reverse mortgage is an instrument that allows a senior to consume the equity in their house without incurring a repayment obligation while they continue to occupy the house. Now, you get a lot of flap about alternatives to reverse mortgages; counselors are supposed to stress alternatives and many loan officers stress alternatives. But there really are no alternatives that allow the combination of equity depletion without a monthly payment obligation while retaining continued occupancy. The reverse mortgage is absolutely unique in providing that capacity. It’s folly to talk about a credit line, for example, as an alternative, because a credit line, although it’s useful for a lot of purposes, has to be repaid while you’re still in your house. You can consume the equity in the house by selling the house, but then you don’t have the house to live in. All the various so-called alternatives to reverse mortgages are not really substitutes for the combination of functions that the reverse mortgage provides. The reverse mortgage is really unique in that regard.

TRR: Why do you think reverse mortgages get such a bad rap?

JG: You have to begin with the premise that the media looks for newsworthy stories. Allowing a thousand seniors to remain in their homes with additional income, which is what a reverse mortgage has the capacity to do, is not a news story. Evicting a senior’s spouse who is not a party to the HECM contract when the senior dies is a potential story or can be fashioned into one. So the various kinds of problems associated with the industry, like the non-contracting spouse who

has to leave when her husband dies, or the hassles connected with delinquent payments, are news stories. The media might also be influenced by the negative aura that surrounds the industry. You remember that in years past, before the enactment of rules that prohibited this, seniors were encouraged to take out HECMs and purchase various kinds of financial instruments and, in some horrible cases, deferred annuities, which couldn’t be drawn on for 10 years or so. Some of the negative aura of those years is still around. And then you have the current marketing practices of reverse mortgage lenders. Lenders do nothing to dispel that aura; lenders don’t make any effort to help seniors understand their options. Some individual loan officers may do that and I know some who do a great job in that, but the practice of the industry in general is not to explain options because that gets too complicated and complexity doesn’t sell. So their standard marketing principal is based on simplicity and the simplest message pertains to how much cash a senior can draw, which is unfortunate because it encourages the most short-sighted of the seniors, and it encourages the others to become short-sighted. And of course, once you start talking about the cash draw issue, it doesn’t help that they make more money in cash draws than in credit line or monthly payment plans… Though I hasten to add that every lender I know is hyper-scrupulous and does not try to influence borrowers’ choices.

TRR: The FHA is in the process of revising the HECM program. Are there any changes that you would like to see made?

JG: The major flaw is the way in which lenders are compensated, and the FHA can’t change that. I think this is a change that would involve Ginnie Mae, because it’s very much connected to the servicing process and the securitization process, so Ginnie Mae would need to play a major role in that. As far as taxes and insurance payments are concerned, escrows should have been required for those right from the get-go. Whatever got into the minds of the early developers of the program to let that go I have no idea, but better late than never. The cure for that is pretty straightforward: They have to find ways to set aside odd amounts so that they get paid. The problem of the non-borrower spouse, that doesn’t seem to be anything very difficult to deal with either. It seems to me that all you need to do is require any spouse who is not a party to the contract acknowledge in writing that they understand that they must leave the house when the contracting spouse dies, or moves out permanently, so they cannot claim afterward that they didn’t know this. But of course, they’ll claim it anyway. I don’t know that it would cure the problem completely, but it would certainly help.

TRR: Considering the troubling statistics about the retirement savings of the boomer generation, do you expect this product to be more commonplace in the future?

JG: I hope so, but it will become more commonplace, I think, only if we meet a lot of the challenges. The challenge is to create more confidence and knowledge on the part of seniors. They have to have more confidence in where they go to get information and the integrity of the source of that information. We’re trying to do our bit in that by providing information on the loan options available.