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.