Reverse Mortgages An Under-Utilized Lifeline
The Retirement Funds
reaching retirement age are living longer than ever, and
retiring with less capacity to maintain their living
standards. The Pew
Research Center has found that between 2002 and 2011, the
percent of adults who said that they “will not have enough
money to live comfortably” in retirement rose from 32% to
53%. Among adults in the 55 to 64 age bracket, the percent
who are “not too” or “not at all” confident that they will
have enough to live on in retirement rose from 26% in 2009
to 39% in 2012.
lack of confidence is well founded. The Center For
Retirement Research at Boston College has developed and
maintains a “National Retirement Risk Index” which uses data
collected by the Federal Reserve in its Survey of Consumer
Finances to calculate the percent of households who “may be
unable to maintain their standard of living in retirement.”
A better title would be “Index of Retirement
Impoverishment”. The index rose from 31% in 1983 to 44% in
2007 to 53% in 2010. The Wall Street Journal has termed this
a “retirement funds crisis.”
Reverse Mortgages Can Help
with equity in their homes can improve their situation by
taking out a HECM reverse mortgage, which provides a variety
of ways to convert their equity into income to meet a
variety of needs. But very few use it, and most of those who
do pull all their equity out at the outset, leaving nothing
for future needs. The number of senior homeowners who
integrate a reverse mortgage into a retirement plan should
be at least ten times larger than it is.
Why So Few Seniors in Need
Select Reverse Mortgages
could profit but don’t are either unaware of the program, or
they are aware of it but their impressions are based on poor
and largely negative information that stokes fears of losing
coverage has been largely negative. A senior being
evicted is newsworthy, even though the senior was a
boarder in the house and not covered by the HECM
contract, while the favorable experience of almost all
HECM borrowers is not news.
Consumer organizations have not supported HECMs, their
attitudes ranging from ambivalent to hostile.
celebrity endorsements used by some of the major lenders
to market HECMs creates a negative image of the
industry, which rubs off on the instrument.
HUD/FHA have been unable or unwilling to do anything of
an educational nature that would counter these negative
Counseling Is Not a Remedy
do support HECM counseling, which is required on every
transaction. However, the only seniors who are counseled are
those who have selected a lender, which means that they are
among the few that have overcome the misinformation hurdles
listed above. Since misinformation discourages seniors from
ever contacting a lender, counseling is not a remedy.
What Are the Real Risks?
time, seniors were encouraged to take out HECMs in order to
purchase securities or annuities, which was an abusive
practice that is now illegal. There are three risks
remaining, all within the control of the senior.
major risk is making a poor selection of the HECM option. I
noted above that all to many seniors withdraw all their
equity in cash, which many will regret doing. Lenders do a
poor job in expositing the pros and cons of different
options, and counselors cannot offer advice. I have tried to
help with this problem by developing a set of calculators
that compare all the options, in terms of both immediate and
second risk is that HECM borrowers who fail to pay their
property taxes or keep their homeowners insurance current
are in default and can be evicted. As far as I have been
able to find out, this has yet to happen but there is always
a first time.
third risk is that people living with the HECM borrower who
are not covered by the HECM contract,
spouses and boarders, will be evicted when the HECM borrower
dies. These cases have been much publicized, in some cases
sensationalized, by media that paint a picture of Government
putting innocent people out on the street. Note that if a
house is owned jointly, both parties must be covered by the
contract and both have the right to remain in the house
until they die or move out permanently.
fact that all the risks associated with a HECM reverse
mortgage are entirely under the control of the senior is a
subtlety that eludes many. The fear of losing one’s most
valuable possession does not encourage rational thought.