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.

New Audiences

By Peter Bell

As an organizer of conferences for reverse mortgage professionals, we are continually looking to expand the product’s horizon.

At NRMLA’s Annual Meeting last October in Boston, we presented both a session featuring financial planners explaining their point of view to loan originators and a special post-conference session for financial planners who wanted to  learn more about reverse mortgages.

At our Eastern Regional in New York in March, we presented both a session featuring security traders explaining their perspective to loan originators as well as a special post-conference seminar on Ginnie Mae’s HECM Mortgage Backed Securities for investors.

At our Western Regional in Irvine in May, we presented a panel of financial planners discussing the growing interest in using reverse mortgages as a retirement funding tool in the wake of three recent academic research reports that were widely covered by national press.

Over the course of these three conferences, our members had the privilege of meeting and hearing from John Salter of Texas Tech, Anthony Webb of Boston College and San Francisco attorney and researcher Barry Sacks, each of whom co-authored one of the research reports mentioned above.

None of these sessions would have occurred or been appropriate just five years ago, before Ginnie Mae launched its HMBS program in 2007, before the recession hit in 2008, and before HUD created the HECM Saver in 2010.  Each of these developments created a new audience eager to learn about and perhaps become more involved with reverse mortgages.

On another panel in Irvine, one that focused on successful techniques for selling both the HECM Saver and the HECM for Purchase (designed for home buying), Eric Hiatt of Security One Lending pointed out that the latter has created a new audience of realtors and builders, while Jim Cory of Legacy Reverse Mortgage suggested that the former product gets an even better reception from estate planners than financial planners.  These are two additional audiences we will now make it our business to corral (perhaps at our upcoming Annual Meeting in San Antonio, where there are a lot of corrals).

I view all of this interest from new audiences as a tribute to the versatility of reverse mortgages as well as to the foresight of those in government and within our industry who made adjustments to the product  that created additional  usages.

What was once thought of as a tool to help seniors age in their family homes or pay for uninsured medical expenses, has continued to emerge-- into a means of expense support while waiting for diminished investments to regain at least some of their previous value; as a means to delay tapping into Social Security benefits that grow by 8 per cent per year between 62 and 70 ½; as a way to pay for long term care insurance;  as funding to maintain an aging home at livable standards, or to purchase a new, possibly more affordable or more manageable home. 

Reverse mortgages are living organisms, continually evolving. There are bound to continue to be new products, new uses, new audiences.  Sometimes amidst the day-to-day burden of conducting business,  we may forget that we are still in an early chapter of a story that continues to be written.

Welcome Financial Planners

By Peter Bell

For far too long, attempting to interest financial planners in reverse mortgages has felt like swinging at a baseball cemented to a hitting tee—it never went anywhere.  But now, suddenly, there seems to be a burst of interest in us within that community. 

“The days of the reverse mortgage being used as an emergency measure are over,” wrote investment advisors Robert Bloink and William H. Byrnes recently on the Advisor One website. “And it’s likely that the use of reverse mortgage in retirement income planning is here to stay.”

“It looks like this is going to be an immensely valuable tool (to create “standby” liquidity),” wrote Harold Evensky, a financial planner with Evensky & Katz Walth Management, professor at Texas Tech and one of the industry’s most influential voices.

Variations on these opinions seem to be cropping up regularly now in the daily press clips we receive from all around the country.  Some of the current advocacy, such as Benny Kass’s comments in the Washington Post and Rick Kahler’s comments in the Rapid City Journal, comes in the form of answers to questions submitted by consumers.

Why are financial planners and advisors coming on board now?   I believe a number of factors are involved:

(1) The creation and implementation of the HECM Saver with its lower upfront costs, offers a more appealing and useful product in the minds of financial advisors. According to Dr. John Salter, Evensky’s colleague at Texas Tech and research partner, “Before the HECM Saver came out, financial advisors had a negative view of reverse mortgages.  They treated them as a last resort.”

(2) The recession has yielded a greater sense of need for utilizing all available financing options given the decrease in home values and portfolios as well as the lower yields on fixed products.  Planners looking to achieve certain numbers (generally around a 4% cash withdrawal rate per year for the balance of life) often cannot find their way there with current yields and without home equity.

(3) Over the past two years, there has been a sharp reduction in criticism of reverse mortgages by politicians, consumer groups and the press.  A close audit of press stories now and then would show this is at least partially a result of NRMLA’s aggressive call out to those who publicly express misperceptions—to provide them corrections and offer them education.

(4)    In an ongoing avalanche of anecdotal justification, good modeling is difficult to refute.  And since businesses are usually bandwagons, once a few high profile players jump on, the crowd generally follows.  In this case, the maestros have been Evensky and Salter.  The latter presented NRMLA membership at our Annual Meeting last October with a graphic model demonstrating that use of a reverse mortgage to maintain cash flow reserves while allowing a portfolio to continue to grow vastly increases the likelihood of not outliving your money.     

Now comes an article by Barry H. Sacks and Stephen Sacks in the Journal of Financial Planning entitled Reversing Conventional Wisdom: Using Home Equity to Supplement Retirement Planning which encourages an active rather than a passive use of home equity in retirement planning and shows that “a reverse mortgage credit line can lead to substantially greater cash flow survival possibilities.”  (Barry Sacks will present this research at NRMLA’s Western Regional Meeting on May 16 in Irvine, California.)

These two studies combined with the recent report from the MetLife Mature Market Institute that shows a vast increase in the number of people 62-64 taking reverse mortgages and thus a corresponding decrease in the average age of reverse mortgage borrowers presents a lure the financial advisory community will find hard to resist.  

We are eager to welcome more and more of them into our conversation.

A Pledge to Reverse Mortgage Borrowers

By Peter Bell

At our meeting in Washington, DC the first week of March, NRMLA’s Board of Directors voted unanimously to implement signing and abiding by the Pledge to Reverse Mortgage Borrowers as a requirement for association membership.  This was a reaffirmation of the viewpoint of the committee of members that worked on writing the Pledge.

The Pledge is the anchor of the Borrow with Confidence campaign, a national effort that we are about to launch created to provide another and even higher level of assurance to America’s seniors that their best interest is our priority.  Its 19 points promise integrity and clarity throughout the reverse mortgage experience.

Why do we need to provide this additional assurance at this time?  Well, all you have to do is read last week’s jolt from within the financial services industry: Greg Smith’s Op Ed in the March 14 New York Times about quitting Goldman Sachs because, as he writes, “it makes me ill how callously people talk about ripping their clients off.”  Suspicion about financial service providers is rampant in the press and the public, and with inappropriate home mortgages pinpointed as the cause of our nation’s recession, it can be hard to argue.  But that doesn’t mean we don’t try to distinguish our business from the other sectors of financial services.  And if this effort is going to be taken seriously, we need to prove that we’re different to back up our claim.

The best evidence we can provide is the most transparency and the fewest surprises for consumers—which are the precisely the goals of Borrow with Confidence.

In addition to the Pledge, our initial Borrow with Confidence effort includes a  Road Map to Reverse Mortgages, which is a step-by-step guide through the loan process.  As an addendum to the Road Map, we have created a tool of advice for children of reverse mortgage borrowers called Should My Mom and Dad Get a Reverse Mortgage? And all of these tools are available and easily findable to consumers on the newly designed reversemortgage.org website.

These tools have been created with input from lenders, originators, servicers, closing agents and counselors all across the country and reviewed before release by our Executive Committee and our Board.  And we are grateful to all of you who contributed.  But despite all the thought and experience that went into them, they will only be trusted if adhered to with unanimity.  One bad egg can ruin the taste of the whole soufflé. We cannot settle for anything less than a 100% buy in to these principles from those who choose to affiliate with NRMLA--which is why a written commitment to the Pledge is from here on in a requirement for membership of the organization.   

If You're Not Part of the Solution...

by Peter Bell


A few weeks ago, Illinois Attorney General Lisa Madigan told a group of seniors she is "getting more and more complaints about reverse mortgages all the time."  A month earlier, Attorneys General Kamala Harris (CA) and Catherine Cortez Masco (NV) announced they were combining forces to crack down on mortgage fraud.   In January, a Florida loan officer along with three co-conspirators were sentenced to 24 to 70 months in prison each and forced to pay over $2 million in restitution for a reverse mortgage fraud scheme. And February ended with the sentencing of six reverse mortgage conspirators in Georgia to a combined 30 years in prison for, among other charges, forged deeds, false appraisals, inflated property values and false down payments.

All of this disappointing news comes at a time when we are noticing an overall improvement in the press's attitude towards reverse mortgages.  An informal audit of printed press, visual media and digital media across the country over the past month shows there were 25 positive stories about different aspects of reverse mortgages.  The only negative stories for the month were reports on the Illinois Attorney General remarks and of the sentencing of the Georgia conspirators.

At a NRMLA meeting in Chicago a few years back, a representative of the city's Office on Aging told us that she had 100 cases of elder financial abuse on her desk and more than 50 of them were complaints within families.  Though anecdotal evidence is not the most dependable, it seems to tell us that there are fraudsters who target our product to steal grandma's funds.  It's easy to say, these are not reverse mortgage problems, they are societal problems.  The money stolen could just as easily have been (and often is) from a CD or a Social Security check.  No lender oversees how the funds are controlled once a loan is made. 

Some say we can't cure every ill in society. But I believe that if the product we advocate is an element of financial abuse and fraud, we cannot simply turn our backs on the problem.

As an industry--and as the industry's trade association--we need to confront these problems.  We need to collaborate with personal finance experts, gerontologists and the new multidisciplinary elder abuse centers to figure out how we might devise safeguards.  We need to work with the experts to find  ways to build widespread awareness of the methods of abuse and insulate our clients from those who prey upon them.

Selling a financial product comes with responsibility that extends way beyond closing the deal.