Housing Bill Hopes To Prevent Reverse Mortgage Abuses Tied To Annuities

image Investment News journalist Sara Hansard recently wrote about an Arizona woman who took out a reverse mortgage and used the proceeds to purchase other financial products recommended to her that didn’t need meet her income needs.  While a situation like this isn’t common, using a reverse mortgage to fund risky financial products continues to be something the media consistently reports on.

“The reverse mortgage was a tool to get the annuity sale” said Michael Black who is a senior adviser for Michael Phillips Black Wealth Management of Scottsdale.  Mr. Black, who also acts as an expert witness in securities and insurance litigation in addition to being a financial adviser added that, “Reverse mortgages are being oversold, not explained well and sold to the wrong people.”

Using a reverse mortgage as a financial planning tool is loved by some and hated by many because it can be abused.  Is there anyway we can make everyone happy and create safeguards for seniors which make sure they aren’t taken advantage?

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Sen. Claire McCaskil is trying.  She was the leading force behind a provision added to the Housing and Economic Recovery Act of 2008 which prohibits lenders from requiring a reverse mortgage borrower to buy insurance, annuities or any other products in order to get the mortgage.  The law also requires that financial companies must institute firewalls to prevent the cross-selling of reverse mortgages with other financial products.

As we wait for HUD to provide guidance on these provisions from the Bill, industry associations like the American Council of Life Insurers in Washington, have said it supports “strong laws and regulations that protect seniors from being misled in connection with reverse mortgages.”  However, “we should not make it difficult for them to get the products that they may want and need,” said the ACLI, which pledged to work with the Department of Housing and Urban Development as regulations are developed to implement the provisions.  To read a copy of the article check out the link below.

Reverse mortgage abuses tied to annuity cross-sales (Investment News)

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  • As a reverse mortgage originator it is my privilege to help seniors obtain the cash they need, when they need it. I am also very concerned, however, when I hear that those with reverse mortgages are twice as likely to own annuities as those at the same age with similar income. With the tenure feature of a reverse mortgage why would that be true?

    As a CPA for over 27 years and with over 16 years experience as the partner in charge of taxes at a regional CPA firm whose principal source of revenues was from auditing and advising union pension funds with significant assets, I know the real value of annuities. But I also know the improper use of these products. I have a hard time believing that twice as many HECM borrowers should be investing in annuities than the US population as a whole in similar situations — except that the vast majority of the US population doesn’t have access to a GROWING line of credit or a tenure payment option.

    When a senior buys an annuity that terminates upon death, they are risking a certain amount of their capital to obtain a specific level of income (some of which will be taxable) for the remainder of their life, however, long or SHORT that may be. It is important to understand that the investment community has never suffered significant losses from selling these products. Then when we hear that seniors who have reverse mortgages and are in their 70’s and 80’s own a disproportionate percentage of deferred annuities with large penalty provisions in comparison that US same age as a whole, doesn’t that trouble anyone else in our industry? I know it does.

    When FINRA warns about reverse mortgages it attacks the mortgage not the use of the proceeds. Why? It seems Mr. Gecko, the fictional character in the movie Wall Street once again got it right. Greed is good (maybe not to the purchasers but at least for the annuity salespeople making the large commissions on these deals).

    I really believe that FINRA needs to monitor its own industry. Further they should be providing “bright line” guidelines on appropriate investments for seniors who because of reverse mortgages become cash richer and home equity poorer. Why don’t they take the lead in helping us to protect seniors against the inappropriate of their cash?

    I love one of the comments recently attributed to a FINRA senior vice president as stating that reverse mortgages reduce the VALUE of the borrower’s home. That is right; a significant representative of the financial industry watchdog told a reporter that reverse mortgages reduce home values. It seems that individual has no idea that there is a clear difference between value and equity. When we have HECMs for purchase and more buyers enter the housing market as a result, I guess that individual will be decrying how reverse mortgages are depressing home prices still further.

    Many of the leaders in our industry believe that recent warnings coming from FINRA are misplaced and are a poor reaction to the increased media and congressional scrutiny of how seniors are using their reverse mortgage proceeds to invest in inappropriate products. I also believe that to be true.

    My hope is that NRMLA and FINRA will come together soon to make joint statements about the proper and improper use of reverse mortgage proceeds. Further I hope some “bright line” guidelines will be developed (and enforced) by FINRA as a help to their members in “advising” seniors on the proper use of their reverse mortgage proceeds.

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