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Bailouts: Pension Funds and the HECM

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American taxpayers are already footing the tab for somebody else’s retirement and that bill is expected to grow considerably. While some lawmakers have expressed a willingness to bail out underfunded private pensions many oppose the continued subsidization of the Home Equity Conversion Mortgage program.

reverse mortgage newsDespite a healthy economy and a generally bullish stock market, several private pension funds are facing insolvency and top lawmakers are considering legislation that would have taxpayers fill the gap.  A special bipartisan Senate Joint Select Committee headed by Senators Orin Hatch (R-Utah) and Sherrod Brown (D-Ohio) is looking for solutions for the mounting pension crisis with a  report expected by November 30. Previously the idea of the government backstopping private pension plans had been avoided for fears of a voter backlash. However, the mounting crisis of multiemployer pension funds facing default has led some to reconsider. The taxpayer backing pensions is not a new concept. Created by Congress in 1974, the Pension Benefit Guaranty Corp. financially backs failing pensions but the pooled multiemployer portion is underfunded with $67.3 billion in liabilities and only $2.3 billion in assets.  Outside the private sector, many local municipalities and state governments are not immune facing cuts to essential services such as public safety to help meet their rising pension obligation payments.

Despite housing wealth being the largest assets for most senior homeowners, its influence pales in comparison with the political clout that private and public employee unions hold with state and federal lawmakers. Much of that influence differential can be attributed to the way that defined benefit plans or pensions are viewed  compared to reverse mortgages. Ironically both have participants who have made consistent monthly payments over several years; the key difference being that reverse mortgages have no defined benefits or promised payouts once the participant begins drawing upon the home’s value.

It’s no accident that some of our international counterparts call their reverse mortgages the ‘home pension plan’. After all the accrued mortgage payments and equity built allow the homeowner to tap into a portion of their home’s value, in essence, annualizing it over time.

For HECMs, not unlike countless troubled pension funds, the government is looking for ways to restore financial solvency through increased contributions by employees (or increased ongoing premiums), reduced benefits (or principal limit factors), and more realistic assumptions of projected returns. Also the Home Equity Conversion Mortgage, much like Social Security, has depended upon its younger participants to pay the bill for older taxpayers who have begun to draw their benefits- both which are not a sustainable strategy. “Younger borrowers with forward mortgages continue to subsidize senior borrowers in our HECM program to an unsustainable degree”, said FHA Commissioner Brian Montgomery in a recent statement on the health of FHA’s MMI fund.

The Home Equity Conversion Mortgage and pension funds face the challenges of shoring up their funds, stemming future losses, and adjusting to a new sustainable economic model that accounts for increasing longevity and a rapidly growing senior population.

2 comments

Karl Kuhn November 27, 2018 at 6:41 am

A HECM is an amazing way to make retirement a reality. Let’s take a look at both sides of the candle wick. 10,000 Baby Boomers turning 65 daily with nearly 50% lacking retirement funds and the other half running out of retirement funds by age 70. Scary when adding the fact that nearly 3 of 4 have no “long-term” care. Let’s add another, more unspoken aspect to this…divorce rate. Why is this important?
I am a divorcee and take care of my 3 children 100%. Medical bills and divorce wiped out an entire retirement portfolio I started in my 20s. There is not enough time to recover.
What’s my alternative? A HECM.
I teach the facts and the HECM’s incredible dynamics across the state of TX.
I sincerely hope this gets traction rather than it disappearing.

Reply
James E. Veale, CPA, MBT November 28, 2018 at 10:52 am

Multiemployer plans are a complex deferred compensation and benefits agreement between three parties: employers, labor, and government. Multiemployer plans are far more than just pensions. These plans cover “earned” compensation and related benefits. The pension portion of these agreements were agreed to during the covered employees working years.

Since 1974, ERISA has demanded that at least three different federal government bodies regulate multiemployer pension plans. They are Department of Labor, the Internal Revenue Service, and the Pension Benefit Guarantee Corporation. This is a matter of law and the proper oversight of employee’s compensation.

The first problem is that the government entered into a contract that by the very design of the oversight arrangement could not succeed. Also the methodology to fund the PBGC was inadequate. Every year, Congress refused to address this ticking time bomb. Yet it is not a select small group of people who will bail out the government for its assumption of oversight on these pensions but the taxpayers that fund the government.

As to Social Security your analysis that the younger generation will fund the older generation is how the system was established but again the number of participants is not a relatively small group of Americans. My grandfather who had paid in about $2,500 into the system in his time of working (he retired in 1955 after working for his employer for over 40 years without ever taking sick leave). Before his demise in 1985, he had received almost $700,000 in lifetime benefits. This was true of most of his peers. Again this was a contract between employer, employee, and the federal government as overseen by the Social Security Administration and the IRS. Worse the government demanded that the payment from the employee come from after-tax dollars while the employer paid from pre-tax dollars.

Now let us compare these two methods of deferring compensation until retirement with the HECM. Like normal in this industry the comparison is treating debt proceeds as if they were the deferred income of the employee. Employees never agreed to pay back their pensions or their SS benefits. Also they EARNED these benefits while they were working. The HECM is a program for the more affluent senior. The homeless get nothing, nor do those who have sold their home in order to cover massive health costs and other life events. Instead because the senior owns a home should they get further benefits? And why have the forward borrowers some of whom are seniors themselves foot the bill for HUD mismanagement of this program? Here the seniors have gotten everything they bargained for. In the case of Social Security and pensions, the benefits have never been fully paid out.

The only common denominator between the three cases is that the government is bailing something out. Bailing the HECM program out is utter nonsense. The contracting parties did exactly as agreed but HUD simply could not and should not be solely overseeing this program. Am I against the program, absolutely not. The idea can and should work, if the overseer would match risk with geocentric PLFs, effectively removing some areas of the country (perhaps temporarily or permanently) out of the system depending on the Home Price Index for the related area in which the home resides over the prior decade.

Reply

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