November 9, 2017
During my lifetime, retirement planning has become more and
more challenging. People are living a lot longer, which
makes retirement periods longer, and fewer people retire
with employer-provided defined benefit pension plans. On the
positive side of the ledger, the rate of homeownership is
higher, home equity is a major part of the wealth of
seniors, and we now have the HECM reverse mortgage program
that allows home owning retirees to convert that equity into
spendable funds. This is a well-designed program with
Government insurance protecting both the retiree borrowers
and the lenders who fund them.
The problem is that very few homeowner retirees use the
program. While about a million homeowners retire every year,
fewer than 60,000 HECMs will be written this year.
Why the HECM Market Is
The fundamental reason is that most senior homeowners view
reverse mortgages with anxiety, suspicion and distrust.
HECMs are complicated, and very different from the mortgages
they used to buy their homes many years earlier. Further,
the capacity of retirees to process information about
something that is new and complex is not what it had been.
In addition, their home is at stake and the last thing they
want to do is risk losing it.
While seniors see many ads for reverse mortgages, they don’t
recognize any of the lender names. And while TV ads using
celebrity spokespersons succeed in attracting some seniors
to individual lenders, the ads repel many others; on
balance, they may shrink the market.
The market for HECMs is highly dysfunctional. Marketing
costs are high and markups are 2 to 3 times larger than they
are in the forward mortgage market. There is no way for
prospective borrowers to shop effectively for the best deal,
which is itself a major source of anxiety.
Because the Federal Government insures HECMs, and because
elderly homeowners are a politically sensitive constituency,
the HECM market is highly regulated. Under a counseling
requirement that is unique to reverse mortgages, HECM
lenders cannot accept an application from a borrower unless
the borrower presents a certificate attesting to the
successful completion of a mandated counselling session with
a certified counselor committed to covering a long list of
topics required by HUD. The problem with the list of
counseling topics is that its focus is preventing sins of
commission, where seniors take reverse mortgages who
shouldn’t. But the major problem is sins of omission, where
seniors who badly need a reverse mortgage, don’t take one.
The existing counselling system doesn’t deal with this
The Counseling System That
It should focus on the threefold problem of the senior
contemplating a HECM reverse mortgage:
- Defining future financial status, including
sources of retirement income, financial assets and
their earnings, and planned lifestyle expenses.
- Fitting a HECM into the retirement plan in the
most advantageous way possible, while taking
advantage of the multiple HECM options that are
available and the flexibility the program offers to
change options in response to changing needs.
- Finding the lender offering the best terms on
the HECM option that is needed.
Here is an over-simplified illustration. John is 62, intends
to work until he reaches 67, and has a deferred annuity that
he purchased some time back that will begin payments when he
reaches 75. During the 8 years after he retires until the
annuity kicks in, he will be short of spendable funds. John
will use a HECM to supplement his income during that period.
To do that, he will take a credit line at 62, allow it to
grow for 5 years, at which point he will use some or all of
it to purchase a term payment for 8 years. Whatever part of
the line he does not need for the term payment he will
retain as a reserve for future contingencies or special
Having identified the HECM he needs, John can now shop
lenders for the best deal. He will be interested in the
largest possible 8-year term payment beginning in 5 years.
If he has concerns about his estate value, he will also be
interested in how much he will owe on that HECM at some
future time. The lenders John solicits will be obliged to
generate the projections specific to his needs.
In sum, a central objective of a HECM counseling system
should be to identify the HECM option that best meets the
senior’s expected future needs. The existing counseling
system is so permeated by HUD’s fear that seniors will be
led astray that it discourages this type of analysis. In its
instructions to applicants who are preparing to be
counseled, HUD says “The job of the counselor is not to
‘steer’ or direct you toward a specific solution, a specific
product, or a specific lender.”
Disclosures Are a Travesty
Disclosure requirements are far more extensive than those
applicable to forward mortgage borrowers. The packages are
prepared by a lender or a counselor, depending on which one
the senior contacts first; usually it is a lender. Since the
borrower has not been counseled on the HECM option that best
meets her needs, the documents must cover a range of
possibilities, which is one reason the packages are so
large. A recent document package I looked at had 97 pages
covering a wide range of possible options that might or
might not have had any bearing on the needs of the senior
receiving it. She is expected to educate herself from an
information fire hose.
Whether on balance these documents do more good than harm is
debatable. Some seniors find the package so forbidding that
they drop out of the market altogether.
Developing a New
The key to developing a HECM market structure that will work
for seniors is a counseling system that focuses on
identifying the specific HECM option that best complements
the individual senior’s financial situation. This is
critical because a loan market will not work effectively if
borrowers don’t know what they want. The system must be
independent of lenders yet have access to current HECM
pricing. Since no one else seems inclined to do this, my
colleagues and I have decided to do it ourselves. Stay