HECM Reluctance:
Are seniors worrying about the wrong things?
Are older Americans worrying about the wrong things? That’s the question put forward in Robert Powell’s recent column in Market Watch. Powell notes a substantial disconnect between real and perceived risks citing a brief written by Wenliang Hou, a former research economist at the Center for Retirement Research at Boston College “The biggest risk in the objective ranking is longevity risk, followed by health risk and market risk. At the top of the subjective ranking is market risk, which reflects retirees’ exaggerated assessments of market volatility. Perceived longevity risk and health risk rank lower, because retirees are pessimistic about their survival probabilities and often underestimate their health costs in late life.”
In other words, studies based on real-life outcomes show that the greatest risk to retirement is outliving your money yet most are concerned about investment risks. Seeing this distortion between reality and perception Finance of America’s recent study should come as no surprise. The study found
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older homeowners are nearly two times less likely to consider tapping into their home’s equity, even with a loan, despite the fact their age and accumulated equity make many ideal candidates to do so.
Finance of America’s 2022 Home Equity Survey found that 94% of homeowners born between the years 1928 and 1945 resisted the idea of tapping into home equity. Not surprising since many of these grew up during the Great Depression. Surprisingly, 89% of Baby Boomers brown between 1946 and 1964 said they were unlikely to consider any home equity product. FAR’s survey concluded that 90% of respondents across all age groups expected their financial advisor would recommend tapping home equity if it was appropriate.
But will most financial advisors make that recommendation or even consider it? It’s a frustrating question to ask considering the largest asset for most older Americans is their home.
The answer can be found in a study FAR cites from the Academy for Home Equity in Financial Planning at the University of Illinois Urbana-Campaign. It finds over 60% of financial planners either cannot discuss home equity or are uncertain how to approach the subject.
The effectiveness of reverse mortgage professionals reaching out to financial professionals has been both touted and disparaged. Touted for the potential to expand our market penetration and help retirees stabilize cash flow in retirement; and dismissed for being an inadequate strategy that few advisors would embrace. The choice is to either discard the idea of partnering and educating financial professionals on the potential benefits of home equity or make a systematic and well-researched approach that encourages engagement, education, and ultimately the recommendation of suitable home equity products for their clients.
As the potential for accelerating inflation mounts and the cost of borrowing surges solutions will be needed. The question is will those who are at risk of outliving their money or reducing their standard of living see the lifeline that may be floating right in front of them? (6-10 familiar with HELOC, less than half familiar with HECM graphic).
The general public’s unfamiliarity with reverse mortgages and advisors’ reluctance or practice of ignoring home equity not only speaks to the long-standing frustration of reverse mortgage professionals and low market penetration, but also of the loan’s incredible potential.
Perhaps a 1975 Stanford study brings the challenge into focus. Researchers found once formed impressions are remarkably perseverant, even despite clear evidence that contradicts their beliefs. Seeing that FAR’s survey finds 9-in-10 respondents trust their financial advisor it may behoove us to reconsider our notions and perhaps make a modest effort to engage retirement planning professionals.
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6 Comments
Engagement with financial advisors is a given, but few are open to education from HECM loan originators who they view as ‘salespeople’.
An excellent point, Jim.
Jim,
What recent HUD released data shows is that there is little empirical evidence to persuade there has been any significant positive impact on HECM endorsement volume from financial advisor referrals. Using the FHA HECM Snapshot Reports for the months of July 2020 through June 2022 (the latest 24 months of such data as of 8/4/2022), first time HECM borrower endorsements (those for Traditional HECMs and H4Ps) fell 12.3% for the latest 12 consecutive month period (ended June 30, 2022), There were about 37,000 first time borrower endorsements in the 12 month period of July 1, 2020 to June 30, 2021 but just over 32,400 such endorsements for the 12 months starting July 1, 2021 and ending June 30, 2022.
Since MetLife presented its ideas on how to increase all RM closings through reaching out to financial advisors for referrals at the NRMLA West meetings at the Irvine Hyatt in 2010, there has been much smoke but no signs of actual fire. Like Shelley Giordano, I was there at the 2006 NRMLA National Convention and read Barry Sacks’ initial take on mitigating risk of loss from portfolio Sequence of Returns, through HECM payouts (later formalized into a 2012 article supposedly Reversing Conventional Wisdom). Since that time several other articles have come out in an attempt to persuade the financial planning and advising community that adding an RM to a financial plan can increase the chance of plan survival from 5% to 95%. While the articles had some limited success, cumulatively they have had the effect of a hand grenade rather than the nuclear explosion that had been predicted by this industry.
Yet don’t the financial advisors you point to have it exactly right? We are RM salespeople. It has been my contention for years that if you want to convince financial advisors to use housing wealth in their financial advising practices, find those in the financial advising community who understand something about RMs and train them to be RM salespeople rather than trying to train RM salespeople to persuade financial advisors to add housing wealth to their financial planning strategies.
Your conclusion is absolutely what has been anticipated all along. It seems Einstein had it right about trying the same old thing again and again and expecting different results. Although many think it is easy to turn financial advisors to include housing wealth as a retirement asset, it is much like the initial talk about H4Ps being the sleeping giant of the industry. Many of us are still waiting to see H4P endorsement production hit 2,700 endorsements in any HUD fiscal year (ending September 30).
Even though you reach the opinion that there will be little success with the financial advising community until it changes its view about us (unlikely) after years of experience trying to do it and I reached that same conclusions from my experience as a CPA for over 30 years back in 2010, the conclusions are essentially the same. However, I am not so sure that the view on how to overcome the problem is the same. My solution requires a financial commitment from lenders at a less favorable time in our history. Yet even this fiscal year when times were good, it seems that lenders have a marginal commitment to reaching out to the financial advising community but insufficient to make it happen.
It is about time to try a different approach but what a bad time to be doing it.
Unfortunately, the reverse mortgage still carries the stigma that it’s just a loan of last resort for broke and desperate people. This is similar to annuities, which have only recently shaken off the stigma they’ve carried for years. Hopefully, the HECM can shake off the stigma, too.
The only way that your alleged HECM stigma changes is by our marketing efforts. The results of the survey that made annuities acceptable are very suspect ;yet the marketing ploy worked.
It seems there is a large hole in your view of the situation. Just when financial advisors were seeing HECM Savers as a useful debt to improve financial plan viability in 2012 and early 2013, HUD in its wisdom removed the HECM Saver as a product we can offer. Yet its success far exceeded that of H4Ps which were introduced two fiscal years before the introduction of HECM Savers. To be clear, in the 13 plus years since H4P was first offered there have been just 27,654 endorsements through June 30, 2022 (for an average of 2,127 H4P endorsements per fiscal year) while there were 14,662 Saver endorsements resulting from the three years it was offered (for an average of 4,887 Saver endorsements per fiscal year). H4P has had 13 plus years of exposure and Savers, just one day short of 3 such years.
The highest the upfront MIP on a HECM Saver could be was just 0.01% of the MCA (Maximum Claim Amount). At the time the highest a HECM MCA could be was $625,500 which meant that the highest the upfront MIP on a HECM Saver could be was just $62.55. Savers were offered as adjustable (with the typical HECM LOC) or fixed. The HECM Saver PLFs were less than for the HECM Standard of the period but both Saver and Standard had an ongoing MIP of 1.25% (not our current 0.5%). Imagine a HECM today with an upfront MIP of $97.08 when the home is appraised for $970,800 or more rather than an upfront of over $19,400. Yet HUD, in its wisdom and after much complaint from originators who did not understand how to sell HECM Savers, decided that September 29, 2013 was the last day we could get HECM case numbers assigned for Saver applications.
Perhaps worse than the stigma you cite has been the high upfront cost of HECMs. Imagine any HECM product that was doing almost 5,000 endorsements per year after being offered for just 3 fiscal years. Until this fiscal year, in its prior 18 fiscal year history (i.e., through September 30, 2021), HECM Refi endorsements averaged 2,721 annually.
HECM Savers were seen as readily justifiable to financial planning clients by such CFPs as Harold Evensky and Michael Kitces, both of whom have been far less supportive of RMs after the loss of HECM Savers. Even the 2012 article by Barry Sacks was based on using a Saver.
The problem is the perception of the products we are selling. More than ever we need the HECM Saver to change how the slightly more affluent view our products. The PLFs for HECM Savers are about the same as our current HECM Standard, so no doubt they would have to be slightly lower if made available now.
While many are longing to see the return of lower PLFs, a substantially higher expected interest rate floor, and maybe a return of the 9/30/2017 MIP structure, right now some of us would just love to see HECM Savers return. While the majority of originators may be lost on how to present their value, HECM Savers could be a big break in how the slightly more affluent and their financial advisors view HECMs. The return of HECM Savers would drop the upfront cost of a slightly watered down HECM Standard (i.e., the HECM Saver) by as much as 65% when charging the full origination fee or even more when not.
Shannon,
Yes, seniors are far more reluctant than was predicted by our industry.
Many proclaimed that once 1/1/2008 came, we would easily trend up to over 200,000 HECM endorsements annually. Talking about being naïve, these prognosticators had the nerve to tell us Baby Boomers would beat down our doors for HECMs. After all, the saying went, unlike their grandparents who never wanted a mortgage and their parents who never saw a mortgage they liked, Baby Boomers NEVER saw a mortgage opportunity they would not at least consider.
Well, we reached 114,692 HECM endorsements in fiscal 2009 but have never reached 100,000 since. Baby Boomers were not the easy sale that so many in this industry indicated that they would be.