The Source of HECM Reluctance?

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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6 comments

JIM WARNS August 1, 2022 at 6:18 am

Engagement with financial advisors is a given, but few are open to education from HECM loan originators who they view as ‘salespeople’.

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Shannon Hicks August 1, 2022 at 6:21 am

An excellent point, Jim.

Reply
James E. Veale, CPA, MBT August 3, 2022 at 11:08 pm

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.

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Mike Roberts August 3, 2022 at 9:05 am

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.

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James E. Veale, MBT August 4, 2022 at 12:38 am

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.

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James E. Veale, MBT August 4, 2022 at 12:48 am

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.

Reply

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