Breaking the Logjam on Reverse Mortgages
People reaching retirement age are living longer than ever, and retiring with less capacity to maintain their living standards. With good reason, this situation has been termed a “retirement funds crisis.”
Yet most retiring seniors own homes in which they have significant equity, which could be unlocked by taking a home equity conversion mortgage, or HECM. The need is great and the potential size of the reverse-mortgage market is enormous, but few are written. The market should be about 10 times larger than it is.
In part, this is due to the lack of a compelling motivation by seniors whose lives would be improved if they took a HECM, but they feel no urgency and so they don’t. The lack of a compelling motivation is reinforced by lack of knowledge, adverse media reports on reverse mortgages, and fears of making a mistake involving their most important single possession — their house.
My colleagues and I have thought long and hard about what was needed to overcome senior lethargy, and have identified four market needs:
-A good information source on how the different HECM options can be used to meet one or more senior needs.
-A reliable and easy-to-use calculator enabling seniors to determine the specific amounts of any particular HECM option, or combination of options, available at their current age and home equity.
-Personalized guidance on HECM options, made available to seniors before they contact a lender.
-An effective online market in which seniors could be confident they were not being ripped off.
One of the valuable features of the HECM is that it offers multiple options for drawing funds, which can be used singly or in combination to meet a wide variety of senior needs. The bad news is that this is not well-understood and exploited. The good news is that this deficiency has already been remedied. A monograph on the topic is available on my website, titled “Which HECM Options Best Meet Your Needs?” It identifies 11 senior needs, ranging from “eliminate payment on existing mortgage” to “purchase a house,” and matches them with the relevant HECM option.
Understanding how the different HECM options can be used to meet different senior needs is one thing. Knowing the amounts that can be drawn and whether they will be sufficient is something else. The amounts available depend on the value of the home, the senior’s age, the interest rate, upfront fees and any mandatory expenses, the most important of which is repayment of existing mortgage debt on the home. In addition, the draw available on any one option depends on how much is drawn of other options.
Generating this information requires a calculator that incorporates many complex regulatory rules, and yet is easy to use. We checked the websites of the more than 200 members of the National Reverse Mortgage Lenders Association trade group and found none that fill the bill. The only calculator that tries to do it all is the one provided by the trade group itself, which is available at ReverseMortgage.org.
This calculator is good but incomplete in not showing the potential for term monthly payments, or projected results for future years. Furthermore, it has all the hallmarks of having been constructed for lenders, using terminology that few seniors will understand. Hence, my colleagues and I decided to construct our own calculator with an eye to making it both complete and more senior-friendly. It is available at http:/// www.mtgprofessor.com.
We will make the calculator available free of charge to any HECM lender to place on their website. The only proviso is that the lender also posts its prices with us so that borrowers can compare the prices with those of other lenders.
Many seniors will be frustrated by even the most user-friendly calculator that is possible to design. They need personalized guidance on their HECM options and whether or not they want to proceed, which is best provided by someone who is not trying to sell them a HECM.
Under current law, before executing a HECM contract, a senior must be counseled by an independent party unconnected to the lender. While seniors can seek such counsel before contacting a lender, in practice they almost always contact a lender first and the lender provides them with a list of counselors. In good part, this defeats the purpose of the rule.
A major reason why borrowers don’t get counseled before they see a lender is that counselors don’t provide guidance on specific HECM options, HUD rules discourage it, and in any case counselors don’t have the tools to assess specific options. To find out how much they can draw, which is the first question seniors generally ask, they go to a lender.
Beginning Feb. 3, any senior with an interest in whether an HECM will meet their needs can obtain free guidance from me, one of my colleagues, or from a mortgage broker working pro bono to help a senior from a state in which the broker is not licensed. Seniors can register for an appointment on my website.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.