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Reverse mortgages are gaining acceptance slowly

Seniors are living longer and need to stretch their retirement savings and portfolios for many decades. A body of research suggests that a reverse mortgages can help do that. Yet, despite an aging population and record amounts of home equity, reverse mortgages represent a fraction of the overall mortgage market. Shelley Giordano, chair and founder of the Funding Longevity Task Force at the American College of Financial Services, discussed the challenges of boosting participation in the program.  

Are reverse mortgages still suffering from an image problem?

shelleygiordanoGenerally, I think it has improved tremendously, but, unfortunately, we tend to have reporters write what they think they know about reverse mortgages rather than actually doing the research, which is always disappointing. The No. 1 misconception still out there is shocking to all of us, and that is that when you take a reverse mortgage, you are signing your house over to the bank. They have never really worked that way, not since 1989. It is just a mortgage with a deferred payment that is insured by FHA.  And if the homeowner dies, that house will be the property of the heirs. So, the idea that you are trading in payments in return for giving away your house is just wrong.  Unfortunately, we still see that.

Are there any other misconceptions?

The other ones are sort of vague in people’s minds. That it is some kind of scam or scheme, without recognizing that 95 percent of the reverse mortgages done in the country are backed by the full faith and credit of the U.S. government. It is an FHA [Federal Housing Administration] loan, and insured. So, part of the cost of setting up a reverse mortgage is that some of your equity is going to be dedicated to insurance. But, what does that insurance do for you? It means that you never give up the title to your house. It means that you can never owe more than what the house brings at sale. So, you will not be leaving any debt to your children. Conversely, if there is equity left over that belongs to you or your estate, even if you use all the credit up, you can still stay in your house. And as long as the house is a principal residence,  you don’t have to make a payment on the principal and the interest. Now it is important to understand that a reverse mortgage is a mortgage. Like all mortgages, you have the responsibility to make your taxes and insurance payments,  and keep the house in reasonable repair.  But that is just like any mortgage.

Reverse mortgages have accounted for around just 1 percent of all mortgages, which seems low given the size of the elderly population and the record equity levels. Why do suppose that is the case?

It is absolutely underutilized. We had a growth industry when the big banks — Bank of America and Wells Fargo — were involved. Those were really deep distribution channels. We had loan originators who were part and parcel of the branch community, and were into branches, and talking to the bank employees about reverse mortgages. So, somebody like a teller would hear that somebody was struggling from Social Security check to Social Security check, and [suggest to that person] that maybe they should have a conversation with a reverse mortgage specialist. When Bank of America, Wells Fargo and MetLife exited, we lost not only the names, which lent credibility to the whole program, but those distribution channels.  When those channels went away, we really suffered a drop in volume. It wasn’t the only reason, but certainly one of the reasons why.

What is the answer to getting more people to participate. Is it more marketing, or something else?

When we lost our distribution channel with the big banks, we thought it would be helpful to go out to financial services folks. We basically ran into a brick wall on that. It has taken us a while to figure it out. What is going on there is that the compliance departments with the financial services firms prohibit financial advisers from talking about reverse mortgages and, in some cases, even [talking about] their housing wealth. There are a lot of reasons for that. There are some structural reasons for that, but we have figured it out.

We have just been very encouraged by the fact that Mutual of Omaha just bought [reverse mortgage lender] Retirement Funding Solutions. So, that is the first big name to be associated with a reverse mortgage company in years. And that company has financial advisers. We have also been in discussions and negotiations with other financial firms that are not yet willing to have their names out there. So, there are four other financial services firms that have studied the question. They have had resource groups where they have a legal department, their sales department, their compliance department, their marketing department and the broker-dealer end of it. What they have concluded in the end is that it makes more sense if they are able to present a discussion about using a reverse mortgage. That doesn’t mean that everybody is going to sign up for one, but it means that in a situation where a reverse mortgage could make a difference in one of their clients’ retirement income security, they will now be able to discuss it. Once three or four dominoes go down, it starts going. We are working very hard at the American College to help the financial services planners and advisers understand how a reverse mortgage works and can help their clients.

How much growth potential does the reverse mortgage product have?

The theoretical potential for reverse mortgages is just astronomical. It is so frustrating that we have so little uptick, not just here, but all over the world. About 85 percent of people 65 and older are homeowners. They have this asset. It is already there. Of course, some people are going to be pushed out because they have too much debt on their home, but it is an enormous number. If there are 77 million baby boomers, and 85 percent of them are homeowners, well, then, the theoretical potential is absolutely enormous.   


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