How perspective & denial shape our industry
Recently I was reviewing some of our earlier articles here on HECMWorld. While this post is from late 2014, it still holds some timeless nuggets of wisdom on how mortgages have been received by the general public, and where the HECM fits in that historical context.
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“Refusal to believe until proof is given is a rational position; denial of all outside our own limited experience is absurd.” These words ring no truer than when it comes to those who embrace or reject the federally-insured reverse mortgage. Reverse mortgage professionals encounter varying degrees of denial with their clientele, but even more insidious is the denial of those in the financial community who often dispense advice which may be harmful to their audience- more specifically attacking the validity of the reverse mortgage or dismissing it outright.
Reverse mortgages have often been the unwanted child of the mortgage industry. Frequently spoken of in hushed tones as toxic, radioactive, predatory by critics the tide is beginning to turn. A 2014 article in the New York Times entitled “Love Them or Loathe Them, Reverse Mortgages Have a Place” reveals a substantial awakening amongst the financial and banking community.
The historical reality is even traditional mortgages were not warmly received. Early mortgages prior to the Great Depression were typically short-term loans where the homeowner had to renegotiate the terms each year. Not surprisingly as home values plummeted in nearly one in ten homes were foreclosed upon. The early stigma was that mortgaging your home was a risky proposition. Even following the establishment of the Federal Housing Administration, mortgages were viewed as a perilous venture. Then let’s consider the economics of a traditional mortgage. A borrower with a 30-year mortgage will have very little of the monthly payment applied to the loan’s principal balance until after year 15. Let’s not forget a borrower could make payments almost exclusively to interest and lose the home after sinking in tens if not hundreds of thousands of dollars of their hard-earned money. So again, which is riskier; a traditional or reverse mortgage?
Fast forward to today. Retirees sitting with their financial advisor will hear the importance of asset allocation while often times they neglect to include their clients largest asset: their home. It seems odd and perhaps borderline malpractice to ignore what is typically one’s largest asset in the planning process. It would seem that even financial professionals can do harm merely by letting their biases and denial influence their recommendations. The good news is times are changing. Retirement reality is about to slap the collective public and the financial community in the face as nearly two thirds or pre-retirees have not saved enough money to live comfortably in retirement.
Alicia Munnell was quoted in the Times article of her belief in the increased acceptance of reverse mortgages saying “When I look forward, I don’t see how people are going to have enough, I really don’t. Our assessment going forward is that it’s (home equity) is a luxury we’re not going to be able to afford. There are going to need money, and this is the place where the money is.”
Denial and an outright rejection of the HECM are luxuries few can afford. The challenge is to position our industry and reverse mortgages (private or federally-insured) into the mainstream of American mortgage lending.
***UPDATE*** Bloomberg released an article entitled “Why Financial Advisors Still Hate Reverse Mortgages” which speaks to the challenge we face in reaching financial professionals.
5 Comments
The comment “A borrower with a 30-year mortgage will have very little of the monthly payment applied to the loan’s principal balance until after year 15. Let’s not forget a borrower could make payments almost exclusively to interest and lose the home after sinking in tens if not hundreds of thousands of dollars of their hard-earned money.” again takes the mortgage out of context. The borrower is not in a position of mortgage or no mortgage. The typical borrower chooses between paying on a mortgage or paying rent. A lifetime renter will pay for 2, 3, or more houses. There are times when renting is appropriate, but long term, the home owner does better than the renter.
If a person looks at a Reverse Mortgage the same way, as one of many ways to turn an asset to cash, it may or may not be the best option. For many of my borrowers, a Reverse Mortgage on their present home offers lower cost housing than government subsidized housing. When presented with a choice of staying in their home at lower monthly cost or trying to qualify for higher cost subsidized housing, many would prefer to stay in their present home. The tragedy is when the person sells a home without considering a Reverse Mortgage. Paying market rent can dissipate the equity quickly. They are left with too much income to qualify for subsidized housing and not enough income to pay market rent.
Don,
You look at keeping a home versus selling a home and renting much differently than I do in advising clients. Those with a real estate background in the rental housing and commercial end of evaluating real estate look at such things as the earnings on the sales proceeds while they are held to pay rent. We also look at the income tax aspects related to the transactions. We also try to look at all of the substantial costs in holding the home versus renting such as 1).property taxes, insurance, maintenance/upkeep costs, interest (if any), selling costs, and 2) rent and rent increases and any differences in utilities costs. We also take into account cash flow that is neither income nor costs such as the principal portion of a mortgage payments. If this is a due diligent engagement we look at HOA costs and the adequacy of all HOA reserves. We analyze for current and any planned assessments for things not covered by existing property taxes on the home that is being held. Of course, we look at other areas of potential concern as they may arise during the work we perform including anticipated short range and long range cost increases.
Even financial analysis is insufficient. This is what FHA tried to address in its misnamed counseling tool called the Financial Interview Tool (FIT). While the tool is useful in part, there is little in it that has much financial value. It is a good interview tool that brings up many issues not addressed in a financial analysis. These things include any anticipated or should be anticipated questions about what is planned on for caring for the senior as aging takes its toll on the skills and activities of daily living including cleaning, gardening, cooking, washing clothes, paying bills, taking showers, etc. It also correctly addresses the problem of stairs in the home. It then looks at the occupants in the home in light of future help to the senior homeowner as aging takes its toll. It addresses other things as well.
While I appreciate overcoming HECM objections using rather imprecise answers on how many times the amount of sales proceeds may have to be used to pay for rent, it is a sales technique that takes little note of the real needs of an aging senior. We need to have a far better understanding of the needs of seniors and how they can start addressing their future needs now. In some cases Medicaid planning may have to be dealt with much earlier than it will be needed.
Here is a thought.
Remember how popular subprime lending was?
Subprime loans came on the scene in the early 1990’s and by the year 2000 everyone in America knew about them.
In fact, they were widely accepted and very popular for many years.
In fact they were not perceived as being negative until AFTER the 2007 market crash.
How did the subprime mortgage loan (a truly toxic product) become so popular in such a short period of time?
And why has the reverse mortgage (a truly beneficial FHA insured product) been around for so many years yet not been able to gain any measurable traction or acceptance?
I believe that the following 2 words best describe the reason.
MARKETING & ADVERTISING!
Simply put, constant, consistent and varied advertising campaign bombardment validated subprime lending into American culture through use of the media.
In the 1990’s and 2000’s you constantly viewed TV ad campaigns, heard radio ad campaigns and saw print ad campaigns about the benefits of subprime lending.
On the other hand with regard to reverse mortgage lending, historically there have been very few companies that have had nationally or even regionally visible advertising campaigns.
Therefore, America doesn’t really know very much about the reverse mortgage.
Of course the companies that are marketing and advertising the reverse mortgage into the general American population are BY FAR the most successful reverse originators, but why point that fact out?
Anyway, this is totally the fault of the retail side of the reverse lending industry.
But why is this the case?
I contend that somehow, through some black hole backward thinking, poorly thought out, illogical reasoning there are many in our industry who have lost sight of what the reverse mortgage was created for.
The reverse mortgage was created to provide “economically average & below average” seniors with access to some of their home equity without incurring a monthly payment.
These “economically average & below average seniors” have a diminished income due to retirement and did not earn sufficient income during their working years to save any measurable amount of money for retirement.
THE FHA REVERSE MORTGAGE WAS NOT CREATED TO ASSIST WELL OFF OR WEALTHY SENIORS IN LENGTHENING THE LIFE OF THEIR FINANCIAL PORTFOLIOS!
Furthermore, who would conclude that the FHA would create any loan product for financially well off seniors who represents 20% of the senior population as opposed to the “economically average & below average” senior who represent 80% of the senior population.
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Now we all know that FHA is a part of HUD
HUD’s mission statement is as follows:
HUD’s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD is working to strengthen the housing market to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; build inclusive and sustainable communities free from discrimination, and transform the way HUD does business.
Does anything in that mission statement suggest that HUD is concerned about financially well off seniors who have financial portfolios?
NO IT DOESN’T!
Now having said that;
Why have so many so called “leaders” in our industry arrived at the ridiculous conclusion that the FHA reverse mortgage is better designed and marketed to the financially well off senior as opposed to larger audience of “economically average” seniors?
This idea defies all common sense logic.
The Solution?
All of the retail reverse mortgage company’s need to start spending some money on advertising campaigns so that we can “collectively as an industry” change the way America views the reverse mortgage through use of the media.
Kevin,
It was good to speak to you the other day.
I have a lot of difficulty with much you wrote about in your comment above. Yet focusing on everything wrong would be the same as focusing on nothing. So let us limit the discussion to a general lack of understanding what the HECM program is as offered by FHA. You state: “Furthermore, who would conclude that the FHA would create any loan product for…” HUD did not create a mortgage we call HECM; that is entirely false. It s Congress that created insurance that FHA offers on mortgages that meet the requirements of a law codified in the United States Code of laws as 12 USC 1715z-20. This law was passed by Congress on and signed into law on
“12 U.S. Code § 1715z–20. Insurance of home equity conversion mortgages for elderly homeowners
(a) Purpose
The purpose of this section is to authorize the Secretary to carry out a program of mortgage insurance designed—
(1) to meet the special needs of elderly homeowners by reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income, through the insurance of home equity conversion mortgages to permit the conversion of a portion of accumulated home equity into liquid assets; and
(2) to encourage and increase the involvement of mortgagees and participants in the mortgage markets in the making and servicing of home equity conversion mortgages for elderly homeowners.”
Please point to the section of the purpose clause for HECMs that states: “HUD’s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD is working to strengthen the housing market to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; build inclusive and sustainable communities free from discrimination, and transform the way HUD does business.”
You also state: “Furthermore, who would conclude that the FHA would create any loan product for financially well off seniors who represents 20% of the senior population as opposed to the “economically average & below average” senior who represent 80% of the senior population.”
Who taught you this? Your presentation has nothing to do with the HECMs FHA insures. Remember the law authorized HUD/FHA to offer qualified mortgagees insurance on mortgages which meet certain requirements. The law did not authorize HUD/FHA to create a mortgage called a HECM. The law does restrict borrowers to a specific age group of senior homeowners but it does not identify that the borrower can have assets of only so much or the home must have a value below a specified amount. Yet somehow you want us to believe that there is a financial line that the borrower cannot exceed. There is no such restriction under HECM law.
I only know the HECM program specified in the law, not the HECM you describe. Perhaps even most of the industry understands HECMs as you do but misunderstandings do not change what the HECM program is.
I hope that helps.
AMEN, Lets Help The People that Truly Need this Program First, I Don’t Mind helping the 20%
but not to the Exclusion of a Big Chunk of the 80% Great Comment.. Thanks