Reverse Mortgages An Under-Utilized Lifeline
March 23, 2013

The Retirement Funds Crisis 

People 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.  

Their 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 

Seniors 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 

Those who 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 their home.

  • Media 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.
  • The 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 influences.

Counseling Is Not a Remedy

HUD/FHA 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? 

At one 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. 

The 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 future consequences.  

A 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.  

The third risk is that people living with the HECM borrower who are not covered by the HECM contract,  usually younger 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. 

The 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.