Original Intent--What Was It and Does It Matter Now?

By Peter Bell

Among the more unsettling of life’s little quirks is believing for a long time that something is good for people and then suddenly being told it is actually bad. I had this sensation upon the release of the Consumer Financial Protection Bureau’s Reverse Mortgage Report whose conclusions contained the observation that seniors utilizing their proceeds to pay off a forward mortgage was not a good thing and not the program’s intent.. This statement resulted in some jolting headlines such as “Borrowers Misusing Reverse Mortgages” on, of all places, the blog of AARP.

“Reverse mortgage borrowers appear to be increasingly using their loans as methods of refinancing traditional mortgages rather than as a way to pay for everyday or major expenses,” the report  reads in its Key Findings section. That is true.  But is it a problem?  Eliminating the monthly obligations of a forward mortgage and thus cutting expenses and freeing up cash for other uses has always been one of this financial product’s more attractive selling points.  And rightly so.

There is nothing in the HECM statute that indicates otherwise.  The program, according to the statute, is designed 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.”   

Now, one might argue that liquid assets are cash or assets that can quickly be converted into cash.  You might interpret that to mean that by using reverse mortgage proceeds to pay off a mortgage, you are using up your cash.  But actually you are freeing up other cash.  Is some cash more appropriate to use then other cash? I don’t see the difference. 

For years we have heard and sometimes published stories of borrowers living on Social Security, perhaps a small pension, occasionally minimal savings, who are a few hundred or couple of thousand dollars short of being able to meet their monthly expenses getting a reverse mortgage and suddenly they can afford to age in their home. In consumer research conducted by Marttila Research for NRMLA in late 2010, 56% of a sampling of 600 senior borrowers said they would not be able to cover their monthly expenses without a reverse mortgage. And 44% said they would have to leave their home without a reverse mortgage.

The stories of these people are the ones that those of us who have chosen a career in reverse mortgages find to be heartwarming, spiritually rewarding, and  provide the justification for the whole exercise.

Suddenly hearing that this is a negative thing from the CFPB is like being told spinach is bad for you.   

But let’s imagine, just for a moment, that the Bureau’s observation might be true and that paying off a forward mortgage was not the program’s original intent when it was implemented in 1987.  At that time, perhaps, no one imagined we would be confronted by a major recession that has taken a large chunk out of both home values and retirement savings.  So if paying off mortgages was not an original intent of the HECM program, but over time the usage of reverse  mortgage proceeds has become more varied and helped some seniors get through a difficult period, why would that be a problem? It seems to me that the flexibility in how a reverse mortgage might be deployed is one of its greatest benefits.     

  

Where's the Beef?

By Peter Bell

The average age of reverse mortgage borrowers has decreased since the creation of the HECM Saver and so it might seem logical to conclude, as the Consumer Financial Protection Bureau has done, that taking out reverse mortgages early in retirement or even before reaching retirement increases risk to consumers; that borrowers who tap into their home equity in their 60s may find themselves without the financial resources to finance a future move.   But there is no data referenced in the report to provide evidence.

What is also not referenced  in the Bureau’s report are the three recent independent research studies by accomplished academicians at three separate institutions that argued the exact opposite—that smart usage of home equity beginning at a younger age can actually prolong the availability of one’s resources. 
Given the amount of press attention throughout the country that these three reports received, they are a rather glaring omission from the CFPB study.  (The report also fails to acknowledge or provide data to show that the risk is tied to the duration of the loan.  People in their 60s who take a reverse mortgage and expect to remain in that home and accumulate compounded interest for the balance of life may well face challenges, but the history of the HECM program thus far shows that the average loan is held for just seven years.)

To review the academic research:

In February, the Journal of Financial Planning published a report by brothers Barry H. Sacks, a San Francisco tax attorney and Stephen Sacks, professor emeritus of economics at the University of Connecticut Law School, entitled “Reversing conventional Wisdom: Using Home Equity to supplement Retirement Income”  that demonstrated how taking a reverse mortgage early could significantly increase the chances of “cash survival” over the long term.

In May,  Alicia H. Munnell, Natalia Sergeyevna Orlova and Anthony Webb of Boston College’s Center for Retirement Research published a paper entitled "How Important is Asset Allocation to Financial Security in Retirement?'' that argued, "Given the relative unimportance of asset allocations, financial advisers will be of greater help to their clients if they focus on a broad array of tools -- including working longer, controlling spending and taking out a reverse mortgage."

Now the Journal of Financial Planning is about to publish yet another study, this one by Harold Evensky and John Salter of Texas Tech (and presented at NRMLA’s Annual Meeting last October), entitled “Integrating Reverse Mortgages with Other financial Products to Create a Balanced Retirement Plan,” that advocates reaching into a reverse mortgage line of credit as a standby tool for your cash flow reserve to meet short term financial needs rather than selling a depreciated asset that can recover in the future.

None of these brief descriptions do justice to these extensive reports, each packed with examples of the claims made.  The counterclaims in the CFPB Report are, on the other hand, lacking in this level of thought and demonstration, which is disappointing.

Many of us in this industry cooperated with the CFPB on their study.  As businessmen with a responsibility to America’s seniors, we anticipated their report and hoped it might finally provide evidence-based findings that would help eliminate some of the bad mythology about reverse mortgages and provide us a clearer fact-carved path towards improving the product.  Instead, unfortunately, as the report now stands, it only feeds the hunger of those who choose to continue the viral spread of the myths and outmoded notions about how and when reverse mortgages might be utilized.     

The Old Ball Game

By Peter Bell

The day after we held a press teleconference to announce our Borrow with Confidence  consumer education effort, we received a call from a producer of Maria Bartiromo’s Closing Bell show on CNBC, inviting me to appear the following evening to discuss its intent. 

On a subsequent call, I was informed they were searching for an additional guest  who was “less supportive of reverse mortgages,” according to the producer.  And so I was not being invited on to present our new educational campaign, but rather to argue about it.

I suppose it is not surprising that in a culture obsessed with sports and politics, far too many things are turned into competition.  Throughout the broadcast segment, the chyron message on the television screen read, “The Pros and Cons of Reverse Mortgages.”

As it turned out, in the one day they had available, the opponent selected for me was Christopher Thornberg  of Beacon Economics in California, whose website describes him as an “Expert in economic forecasting and real estate dynamics.”     Dr. Thornberg has a PhD from UCLA, is by all indications an extremely intelligent man and speaks frequently about economic issues.  What he does not have is any real background in reverse mortgages. 

I am not sure why he was tempted to appear on this particular segment.  Is it that in this world of the blogosphere we have all become critics and are willing to speak negatively about anything?  Or possibly that the chance to be on television for someone who makes his living as a speaker is of such value that they will talk about whatever you ask?

In any case, I was invited to be the pro side and Dr. Thornberg was invited to be the con side.  While I discussed the value of counseling and the insurance fund, comparison of closing costs to conventional mortgages and the tools offered by the Borrow with Confidence campaign, Dr. Thornberg’s cons were of such a general nature that he could have used the same comments to debate against health insurance, iphones, dating, kale or almost anything else I can think of.

“At its surface, this (reverse mortgages) is a great idea,  just like subprime mortgages at its surface was a great idea as well,” Thornberg began.  “But we know in both circumstances there’s a lot of room for shenanigans .  And of course, with reverse mortgages, because you are dealing with people in retirement this leaves very little room for air.”

“Maybe the underlying industry is good today, but as this grows there’s going to be problems and there have to be regulators there to make sure the problems are kept to a bare minimum.”

After I ran off a series of regulations and said we are a business of transparency, Dr. Thornberg, the opposition, responded, “I agree with most of what he just said.”  Only to go on and say, “In any of these growing industries, there’s going to be problems on the edge.”

When Ms. Bartiromo asked him, “What should regulators be doing?” Dr. Thornberg replied, “There has to just be a lot of basic clarity.  Consumers have to see both the upside and the downside.”

You get the gist. 

The point here is not to in any way make fun of Dr. Thornberg or anyone else. But we are living in an economy where so many seniors are in need and a reverse mortgage can fill that need.  Just a week later, the CFPB offered their report claiming seniors are confused about reverse mortgages.  Here was an opportunity to explain the product to a sizeable audience.  But by turning the show into a ball game instead of an educational opportunity, the producers and CNBC eliminated the chance for the fifteen minute segment to do any public good. 

I have requested an opportunity to revisit the show and discuss reverse mortgages one-on-one  with Ms. Bartiromo.