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.
I agree with you, Peter. It is a lot like being told eating spinach is bad for you, because health professionals take stands on health issues then reverse their stands with each new study.
ReplyDeleteIf the intent of the HECM statute was, as so many of us have been told, to promote seniors staying in their homes since seniors who stay in their own homes live longer healthier lives when they stay in their own homes, then here is the issue. In 2006, I was told by many seniors that reverse mortgages have so many bad features that they would rather take out an equity line of credit with their bank than get a reverse mortgage. In most cases, they had IRAs and pensions in place and wanted a little money available "just in case," Those same seniors ended up dipping into their lines of credit when the downturn in the economy trashed their IRAs and pension funds. Then the banks cut their lines of credit off and turned them into loans they are having to pay back. How are these seniors supposed to have the funds to live in their homes if they are making such payments? The reverse mortgage looks like a good solution for them to have money to pay for higher utility costs and grocery costs instead of a mortgage. But wait! Now they should not use the proceeds of a reverse mortgage to pay off that mortgage? Has the CFPB really thought this through?
The bureau has a strong senior management team which lacks little in management skills, career experience, legal knowledge, or intellectual capacity. Surprisingly where this team lacks is in the areas of economics, finance, and accounting. The report reflects this lack.
ReplyDeleteWithin minutes of obtaining the report, it was apparent that the authors did not understand basic and simple cash flow principles. If they had, they would have realized that there is little difference between increasing cash inflow by a specific amount or decreasing cash outflow by that same amount unless there is a significant difference between their tax or other economic impact.
There is some merit in discussing the time value of money in the context of reducing cash outflow or increasing cash inflow but that becomes rather theoretical and ethereal when both last for approximately the same period of time or both exceed the expected life of the reverse mortgage.
The report ignored financial, cash flow, and economic issues to focus on the original intent of the program. In doing so the authors displayed the strength of the bureau, law, but exposed their lack of understanding that increased cash inflow of a specific amount is economically no different than a reduction to cash outflow of the same amount.
Assistant Director Skip Humphrey who oversaw this report has a well desired reputation for reason and fairness. There is little cause to believe that bringing our concerns to the attention of the Bureau will fall on deaf ears.