Why public and private barriers have prevented wider use of reverse mortgages and annuities

Both products are underutilized according to Jack Guttentag, who continues to advocate for synergies between the two

Home Equity Conversion Mortgages (HECMs) and annuities are two retirement products that remain underutilized, in part due to public policies preventing potential synergies from being explored by American retirees. This is according to Jack Guttentag, also known as the “Mortgage Professor,” in a column at Forbes.

“As of now, there is no significant integration between any of the components of retirement plans,” Guttentag wrote. “A major consequence is that both annuities and HECMs are substantially underutilized.”

Part of this comes from the fact that both products are primarily promoted most by those who directly benefit from them: annuities from insurance agents, and HECMs from loan originators and brokers, he said.

“HECM reverse mortgages were designed to supplement the finances of elderly homeowners having limited financial assets,” Guttentag wrote. “Instead, most are deterred by the complexities of the HECM program, and by adverse publicity from journalists who often don’t understand the complexities either. A large proportion of the homeowners who do take HECMs are in financial distress.”

The limited uses of both HECMs and annuities are attributable to both public and private barriers, he added.

“The private barrier is the financial asset management industry where the compensation of advisors is based on the amounts under management,” he wrote. “Since purchase of an annuity by the client of a financial advisor is very likely to reduce the assets being managed by the advisor, few of them propose an annuity purchase.”

The public barrier arises from the HECM program, he added, particularly notable incidents early on in the life of the program, “where HECM/annuity combinations were offered at extortionate terms, reflecting the complexities of both instruments and the lack of information available to retirees for dealing with them,” he wrote.

The response of the U.S. Department of Housing and Urban Development (HUD) to this was to create barriers between HECM lenders and insurers, which required HUD-approved HECM counselors to “warn prospective borrowers of the dangers of annuities,” he wrote.

“In sum, public policy at both the Federal and state levels is hostile to annuity/HECM integration, the tools most needed by consumers having low and moderate income,” he said.

Guttentag’s ideas related to the potential synergies between HECM loans and annuities have been the subject of several columns he has written in the past, including one earlier this year describing the perceived lack of interest financial advisors have in using the HECM program as a retirement planning tool.

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