Despite the need, the HECM has yet to reach its full potential
Whatever happened to the mainstreaming of reverse mortgages in retirement plans? So begins a column by Mark Miller in Wealth Management-com. It’s a question worth considering. Since its record endorsement volume in the fiscal year 2009, HECM loan volume shed over two-thirds of its volume by 2020 to rebound slightly last fiscal year thanks to record refinances of existing HECM loans. Many pinned their hopes that increased acceptance of reverse mortgages among financial advisors would help spur growth and move the needle on the industry’s two-percent penetration of eligible households.
The impact of big bank distribution channels
The pinnacle of HECM loan volume arrived following…
———— JUST RELEASED: JANUARY TOP 100 RETAIL HECM LENDERS REPORT ————
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the adoption and promotion of the federally-insured reverse mortgage by large national banks including Wells Fargo and Bank of America. The value of this distribution channel cannot be overstated. In seven short years, HECM endorsements surged 778% between the years 2002 to 2009 from 13,000 to nearly 115,000 loans.
Following the housing crash of 2008 Bank of America announced their departure from HECM lending in February 2011 with Wells Fargo following suit in June of that year. The sudden departure of the banks was then attributed to the unprecedented regulatory powers of the newly-created Consumer Financial Protection Bureau, changes in loan compensation, and repetitional risk as HECM defaults surged and home values plummeted.
The loan that started the conversation
Ironically, it was against this backdrop the HECM Saver was brought to market. This small-dollar reverse mortgage offered drastically reduced fees for borrowers looking to secure more modest loan proceeds. While the loan didn’t bring the anticipated consumer acceptance many hoped for it brought the HECM into the conversation with many financial advisors for the first time. In the April 2012 edition of the Journal of Financial Planning Harold Evensky, Shaun Pfeiffer and John Salter introduced the concept of using a reverse mortgage as a way to reduce the hazards of taking retirement distributions while avoiding a sequence of returns risk. While this concept brought some measure of academic acceptance of the HECM among financial professionals it did not boost loan acceptance as hoped.
Waiting for the surge
So when will reverse mortgages go mainstream? Miller’s Wealth Management column entitled Waiting for the Reverse Mortgage Surge hints at an uptick of interest in the HECM among retirement professionals. In the column, Wade Pfau, professor of retirement income at The American College of Financial Services is seeing increased interest among registered investment advisors saying, “I think there’s, at least, more willingness to consider when they might have a role in a plan. So, you’ll see more RIAs using them.”
Steve Resch, vice president of retirement strategies at Finance of America Reverse, expressed frustration at the loan’s persistently low market penetration in the column. “In a fiduciary environment, you’re looking at all sorts of things that might be right for a client. And so how do you look at someone’s situation and think, ‘well, home equity could really work well for them,’ but not mention it to them?”. I couldn’t agree more. It’s akin to a doctor failing to mention a potential cure to help prevent or treat a patient’s disease.
While the reverse mortgage remains a robust and flexible option for retirees to hedge against financial shocks or improve their standard of living, its acceptance among the American public and financial professionals has a long way to go.
Resources cited:
Wealth Management-com: Waiting for the reverse mortgage surge
Forbes: Academic Acceptance for Reverse Mortgages in Retirement Income
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6 Comments
It will be difficult for this product to become “mainstream” as long as government agencies at all levels discourage it like they do now. As I see it, the regulators don’t understand the benefits of the product. My book, “Why a Reverse Mortgage?”, tells a few stories. There are many more stories of how this product transforms the lives of seniors, their children, and grandchildren in positive ways. Every Reverse Mortgage we originate is positively life transforming for the borrowers and other family members. The regulators and industry leaders miss the stores of what happens to the people who are afraid to get a Reverse Mortgage; foreclosure, distress sales, forced moves to places the person doesn’t want to live, and more need for subsidized housing.
As I see it, the people who write the rules rarely talk to actual borrowers or people who have missed the opportunity to get a Reverse Mortgage. One big misunderstanding is that if a person can qualify for a Reverse Mortgage today, they can get one later when they need it. Nothing could be farther from the truth. I have many stories of people who missed the opportunity and then couldn’t qualify when they wanted one.
The speed with which the FHA Reverse Mortgage insurance fund has turned around shows the current FHA mortgage insurance rates are too high.
There is significant misinformation being distributed by counselors because they don’t have easy access to correct data.
President Biden clearly wants to promote tax funded housing instead of solving “affordable housing” issues with Reverse Mortgages. Properly structured Reverse Mortgages could significantly reduce the need for tax funded housing. I tell a couple of stories in my book. Nothing kills these opportunities as fast as government “forbearance” programs. Who wants to share their home with a boarder when some government agency can and will block the eviction of a problem tenant?
Better coordination between the FHA people that control Reverse Mortgages and the people that control Medicaid would be helpful. Better coordination between the FHA people who control Reverse Mortgages and the people who affect housing prices and inflation would be helpful. Better loan servicing could significantly increase acceptance by eliminating false evictions and other false claims by servicers.
There are many ways the program could be improved to make it more “mainstream”. The changes would not be hard to implement if the leaders in government and industry were paying attention.
I believe in empirical evidence and discount dreams of a growing population of unicorns.
First, the number of 1st time reverse mortgages borrowers is still in secular stagnation. The talk of greatly increased financial adviser referral demand is all but an opioid in our cottage industry. The illusion is fabulous.
Second, those who believe that we will see a
substantial rise in RM (reverse mortgage) closings due to financial adviser referrals only have stagnant stats for first time RM borrowers to validate and verify their claims (as do those who claim that the population of unicorns is on the rise).
The word WAIT should be a term of derision to RM originations but there it is for all to read. It seems the industry is resigned (another word for defeated) when it comes to turning things around.As they say, we are where we are and unfortunately we seem resigned to stay there and WAIT (that is if the HECM Refi market keeps expanding) and WAIT and WAIT, even if it takes a decade to return to over 114,000 HECM endorsements during a single HUD fiscal year (nowadays that would be a great total for two consecutive HUD fiscal years).
I agree with many of Don Opeka’s points and observations but strongly doubt if the industry can return to the golden years of 2007-2009 with today’s products. That seems impractical although it is a spectular dream to many of us.
I strongly believe in verifiable, empirical evidence in business and am highly critical of dreams of sn increased unicorn population. This comment strongly criticizes the seemingly razzle-dazzle approaches we see going on in our industry when it comes to reaching out to financial advisors.
First, the number of 1st time RM (reverse mortgage) borrower closings is still in secular stagnation (i.e., in the condition of long-term no growth) The talk of greatly increased financial adviser referral demand is all but an opioid in our cottage industry; yet the illusion is fabulously additive to many; the same was true with the exaggerated illusion that H4P endotsements, as established by HERA on July 30, 2008, would become half of our total annual HECM endorsements in but a few years after 2008.
Over the next three or so years, everybody in our little industry seemed to be able to repeat the equation that initially justified the widely held belief of RAPID toal HECM endorsement growth from H4Ps. It was all but a proven fact among it’s proponents. Some proponents would spare with those who rationally doubted the illusion by stating that they could “prove” their stand and then used the same equation to make their point as if the equation was a proof of a greatly discredited illusion. Where was the verifiable, empirical evidence backing such an illusion? As is the case with true believers in widely held illusions, facts just seem to get in the way. Even after changes to make the H4P more attractive to seniors, H4P is hardly the product we believed it to be back at the 2008 NRMLA National Convention. The excuse of the fanatic supporters for the failure of H4P to fulfill that illusion was the phrase that H4Ps were the sleeping giant of the industry and that originators were too LAZY to originate them. A phrase far less en vogue today. But did we learn the lesson about additive illusions?
Second, the industry as a whole was exposed to the concept of mitigating the risk of loss from the sequence of returns in an investment portfolio through a paper written and distributed by Barry Sacks at the 2006 NRMLA Naional Convention at the San Francisco Hyatt on the Embarcadero which is now over 16 years ago and was distributed over 2 years BEFORE a single H4P was ever endorsed. Supposedly the strategy (not a position espoused by Sacks) was going to produce herds of unicorns back then as about the same as the renewed (and so called) coordinated distribution strategy is exaggeratedly touted today. The H4P illusion is all but over but the illusion about unlimited growth from referrals by financial advisers through touting this unproven (based on verificably empirical evidence) strategy is not. Again a simple retort of the illusion of growth through touting the coordinated distribution strategy is where after 16 years is first time RM borrower who can produce not a testimonial but verifiable empirical evidence that it works. Even it’s devotees have not personally engaged in providing this verifiably empirical evidence (but of course, I realize that few if any of these promoters are old enough to have produced such evidence BUT many of their parents, aunts, uncles, grandparents, and even customers are that old).
Third, the comment by Don Opeka is strongly representative of a substantial segment of our originators who had success and great satisfaction in helping less affluent seniors save their homes especially before October 2, 2017, when principal limit factors were significantly higher. Such originator attitudes and fulfillment are not generally compatible with using that same origination core to execute an origination campaign that is driven by pursuing referrals from the financial advisers of the relatively affluent senior community. Several of us tried to address this apparent conflict but this opiate (i.e., the illusion) was so overpowering that even the idea of a conflict fell on deaf ears. In reading Don’s comment, it seems the vitriol of the comments of yesteryear have calmed down but the outlook of that desire to save senior ownership in their homes has not. So once again where are the originators who will drive this current campaign to turn financial advisors into highly productive referral sources? The opportunities of refnancing the HECMs of those that we once described as house rich but cash poor has renewed the vigor and desire of many of these originators to stay in the industry and return it to the much greater success of yesteryear. So RM originations by first time RM borrowers languish in stagnation since it is highly unlikely that today’sHECM is as capable of rescuing as many seniors from foreclosure as was the case with the older versions of HECMs back in 2006-2011.
Fourth, if this campaign in reaching out to financial advisers is to succeed, RM management attitudes need to change. Seeing managers at some originating entities question why a relatively wealthy individual who had been advised by their long time financial adviser to get a RM would even want an RM is not just galling but also self defeating. If the anecdotes are even partly true then some of those originators who try to drive this renewed outreach to financial advisors will be doomed by RM management when the RM applicant and the related RM meet the standards set forth in this renewed campaign. So should management personnel be changed? RMD publishes some of those changes sporadically but as of yet those changes are not making a difference in first time RM borrower closings.
The word WAIT should be a term of derision to RM originations but there it is for all to read. It seems the industry is resigned (another word for living in a state of defeat) to secular stagnation except as to HECM Refis. As they say, we are where we are because of what and who we are; unfortunately in our case, we seem resigned to stay there and WAIT and WAIT and WAIT (that is if the HECM Refi market does not greatly and semi permanently contract), even if it takes a decade or more to return to over 114,000 HECM endorsements during a single HUD fiscal year (nowadays that would be a great total for even two consecutive HUD fiscal years). So when will financial advisors save us from this depressive lanquor in the outlook for increased first time RM borrower originations? And what if these currently “en vogue” strategies fail to attract sufficient numbers of referrals from financial advisers, what then?
Perhaps the answer is not to sell “unproven” strategies especially through overblown and somewhat questionable articles (where some draws are compounded annually rather than monthly and the dollar growth in upfront costs over 30 years apears to be intentionally ignored). Getting back to basics seems far more appealing, relevant, and sustainable in reaching out to financial advisors but the power of the illusion of a swiftly growing unicorn population is drownding out more sustainable approaches. Withdrawing from opiates can be horrific but the end results are….
Retirement is essentially about Asset Dissipation. What are the most common assets people have to dissipate? Investments (such as IRA’s) and Home Equity. Wade Pfau does a great job of raising the question of “why not dissipate from both sources”? Home equity seems to be the sacred cow – yet withdrawls from a HECM are tax-free vs withdrawals from one’s IRA. Using BOTH is smart and compelling – especially when looking at the sequence-of-returns risks.
Home equity is not an asset. It is name of a very specific type of subtraction problem. Like all subtraction problems, the difference can be positive or negative. Some might argue that with a HECM, the answer is never below zero since it is renonrecourse but that is a error in the following two important ways:
1) the only time nonrecourse comes into is at the time payoff, and
2) nonrecourse cannot be determined by solely looking at the home. The existence of nonrecourse can only be determined by analyzing the loan documents since all reverse mortgages are nothing more than a liability.
Some want to declare that the HECM LOC is the asset of the borrower which is utter nonsense. First, the borrower has a limited right to the LOC. If the borrower is 1) bankrupt, 2) is in default on taxes, insurance, HOA dues, land rent, or other property charges, or 3) is in violation of some other loan covenant, the borrower has no right to the LOC. Unlike an asset, creditors cannot force a borrower to take proceeds from a HECM LOC, including the IRS — NOR does the estate, trust, heirs, or beneficiaries have any rights to HECM LOC despite the death of a borrower.
At best, the available HECM LOC is a contingent asset; yet the UPB is a debt collateralized by the home, making the available line of credit not only a contingent asset but also a contingent liability.
Home equity is NOTHING more than the answer to a math problem.
Dissipation only means that an asset is going down. Let us say the investment portfolio drops $200,000, does that mean that the owner’s net worth went down? How would we know unless we know how the money related to the reduction was spent? If it was used to pay off debt is that dissipation of the net worth of a retiree?
Perhaps a more appropriate term is decumulation of the retiree’s net worth. Dissipation of any asset is not the same as decumulation of the retiree’s net worth
Dave,
An IRA is not an investment? It is a vehicle owned by a US taxpayer from which investments are made. Neither one’s will nor trust instrument controls who inherits an IRA. The IRA documents control successor ownership.
IRA’s can be taxable or nontaxable (specifically a qualified Roth IRA). In specific cases IRA contributions may be nontaxable WHILE earnings on those contributions (and prior earnings) are taxable. IRAs are not what you say they are.