Crossing The Line With Reverse Mortgages

Caught like proverbial deer in the headlights, reverse mortgage originators engaged in what is collectively called “cross-selling” are treading ever so carefully – if at all – into such extended marketing activity. According to the national Housing and Economic Recovery Act (HERA) passed last year, “neither mortgagees nor any other party may require mortgagors to purchase insurance, annuities or other additional products as a requirement for, or a condition of, eligibility for HECM insurance” – the government guarantee that facilitates most reverse mortgage lending.

“It should be allowed,” asserts Lisa C. Iannini, referring to cross-selling. But Iannini, chief compliance officer, Genworth Financial Home Equity Access, Inc., Rancho Cordova, Calif., notes that “lenders like us are afraid to take [that] step and ruffle regulatory feathers without express permission.” Such permission, or clarification, in the form of a HUD Mortgagee Letter, has yet to be issued.

“We don’t know if rules will tighten,” says one executive of a large insurance company, who adds that until there is official approval, “Agents are offering to send [reverse mortgage] referrals, but they’re not going full-speed.”  While saying that cross-selling restrictions will be “good for the industry,” the executive is concerned that HUD could “go too far to the wrong side” in prohibiting all cross-selling.


Genworth’s Iannini says regulators may be confused about what cross-selling actually entails. “Ideally,” she explains, “an insurance person would help existing clients who might also benefit from having a reverse mortgage. We have over 100,000 contract insurance agents who could be presenting this opportunity to the right borrower,” she reports.

Neil J. Morse has been a communications professional working in the mortgage finance industry for more than a decade, currently specializing in the reverse mortgage sector. He can be reached at

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  • I applaud Lisa Lannini for her honest and frank reply stating that in some instances cross-selling should be allowed. Many will disagree because it opens up a whole grey area ethically and legally. I often wondered how an insurance company such as Genworth who originates reverse mortgages would view this issue.

    I personally understand and appreciate the restrictions HERA placed on cross-selling, however I feel there are a few areas that need to be considered. One is the ‘catch 22’ of doing what’s best for the client, or what is the safest for the originator/advisor (CYA). There may be a strategy that would in fact benefit the client more with the use of a life insurance or annuity however due to regulation and scrutiny most will steer clear even if it is in the client’s best interest.

    Survivorship issues for non-borrowing spouses could be addressed with a life insurance policy. Continued income if the client stays in the home or not with the reverse could be addressed with an immediate or deferred annuity. Not always, but sometimes. In fact the borrower’s TALC is actually lower when they make use of more money at the beginning of the loan. For example, incurring $13,000 in closing costs to only get a $5,000 draw and the balance in the Line of Credit skews the TALC up considerably. This is not to say most would benefit from pulling out maximum proceeds but it’s a point to be considered even with interest accrued.

    Also, when a borrower pulls proceeds from the reverse and places them in any external account or investment vehicle, they are shifting more of the risk to FHA. Let’s say a client only pulls out a portion of their available money and has a large line of credit left when the last borrower dies. In this scenario if the loan balance has grown considerably it must be repaid and the surviving heirs must sell the home to recapture any remaining equity. In many cases the heirs may get much less money than if the equity was separated in the beginning. If, however, the money was already separated the funds would be paid immediately to the named beneficiary. Borrowers must understand the untouched line of credit is not made available to heirs and only represents available funds during the lifetime of the borrowers.

    “HUD going too far to the wrong side” to correct the issue may be referring to a proposal to outright ban any insurance-licensed individual from originating reverse mortgages. Currently HERA only requires “firewalls” within lenders to prevent/discourage cross-selling.

    Another issue not mentioned is the common standard in both the securities and insurance industry that prohibits the investment of proceeds that come from home equity. A reverse mortgage would definitely qualify as such a transaction.

    These are just some points to ponder. I believe some of HERA’s restrictions on cross-selling are to protect the senior and the rest to protect against claims on the FHA fund for deficiency balances paid in the future.

  • A few bad apples in the Insurance industry started this negative trend by sticking Seniors with “deferred” annuities. Long Term Care Insurance, Medigap Insurance, Immediate Annuties and Life Insurance can make a lot of sense for folks who are getting a Reverse Mortgage, but the bad apples tainted and confused the industry, so now many homeowners don’t receive sincere helpful advice and solutions to their situations from folks like me.

    I’ve had so many people come to me to get their Reverse Mortgage because they wanted to be able to afford the premium on Long Term Care Insurance, and others wanted Life Insurance to offset the loss in equity from the Reverse, and other homeowners wanted to hear how Immediate Annuities work because they desired a guaranteed income stream for life. Everybody and every family has a different situation and some solutions work well and others don’t – and I’m an honest Reverse Mortgage Originator and licensed to offer all the insurance related products – and I feel I’d do a better job offering reasonable well thought out solutions for my clients – but I don’t – because I too don’t want to cross the line … even though I can’t quite figure out what that line is. So I leave the Insurance side of the business alone and hope my clients don’t sign up with one of those bad apples.

    It’s really sad and the only way out of this is by getting the Insurance Companies to agree their Agents “will not” sell deferred annuities to folks who have a Reverse Mortgage. That’ll cause the bad apples to rot and go away.

  • This article was educational not because of its content but despite its content. It showed how little people in our industry actually understand the issues. It was interesting that the one insurance executive who was quoted was not named nor was the insurance company identified.

    The first two comments were made by insurance salespeople who originate HECMs. I know one and think very highly of his judgment and reasoning. The other I do not know. These two commentators added little light and helped confuse the issues.

    For example, it is not true that TALC will be less by taking out more monies. TALC stands for total annual loan costs. With higher balances, costs will always rise. What is true is the percentage of costs to proceeds that the schedule displays will go down as to adjustable rate reverse mortgages and only adjustable rate reverse mortgages (unless someone is preparing the TALC schedule for fixed rate reverse mortgages showing only a portion of the available proceeds as taken). This issue is so emotionally charged that one of the finest minds in our business got caught up with incorrect statements and conclusions.

    To make everyone clear HERA does not restrict cross-selling on all reverse mortgages. Its provisions are restricted to HECMs and HECMs alone. Some might want to argue that Congress knew that their actions would stop all cross-selling. Again that is wrong since at the time this amendment was considered, we had several proprietary products including HomeKeepers.

    As part of the former NRMLA Education Committee, I personally requested that one of the sessions of the 2007 national convention in San Diego, California, be specifically on annuities. The purpose of that session was to have been a demonstration of when the use of HECM proceeds to acquire an annuity is superior to HECM tenure payouts. The basic hope was that the issue of risk, costs, tax issues, fees, and other matters would be fully explored and analyzed. Unfortunately because of a NRMLA committee conflict I was not able to attend that session. Some who attended reported that the session devolved into a presentation on why originators should also sell annuities. Reprehensively some of the advocates originated reverse mortgages in California where the activities that were specifically alleged to have been advocated were illegal under California Civil Code 1923.2(i) at the time of the presentation. I really wish I could have been there.

    Some believe that they understand the HERA provisions on cross-selling yet based upon what they say and write, their self-assessment is generous. Yesterday I submitted an article on cross-selling to Admin to be released this week. After reading this article with its current comments, the article submitted needs to be revised. I am personally very grateful for everyone who has participated in the article and the chain of comments; I have learned much.

  • I have three cases on my desk right now where I am acting in an expert capacity for attorneys trying to explain to them WHY a deferred annuity to an 80 year old widow constitutes at best poor judgment and at worst a criminal act.

    This is a much broader problem than what has surfaced. It requires real, substantial firewalling between divisions of companies where cross selling is part of the plan. There is such an inherent, unmistakeable potential for conflict that I hope we actually get guidance with teeth so there is no grey left to the analysis.

  • Sometimes we type faster than we can formulate a 100% accurate thought. Jim is absolutely correct about TALC. Thank you. The term “percentage of costs” to proceeds would have been a more accurate statement that reflected my intended point. In other words, a borrower should understand their true cost of “borrowing” money if they incur large closing cost and then make very little if any use of the open line of credit. Some could argue it’s an opportunity cost.

    My point was to open up some good-natured debate on this subject because it’s needed. This may appear to muddy the waters to some but I believe the more we can discuss this issue from all sides the better off we all will be, sometimes that entails playing “devil’s advocate”. Why? Because the much of the cross selling debate hinges on subjective interpretation thus we must look at the issue through the eyes of those we don’t agree with to appreciate both sides of the argument.

    Personally I see cross-selling of any insurance products by a loan officer to their borrower a gross example of not only a conflict of interest but one of too much control being placed in the hands of that originator. In addition there is the problem of investing home equity proceeds which most insurance companies prohibit. Even more appalling is one large reverse mortgage company from southern California who openly admits and promotes the fact that they cross-sell annuities to their own clients. Wow.

    Hopefully that clears up any misunderstandings. This subject is fraught with emotional hot buttons, subjective interpretation and legal/ethical problems. It is my hope our discourse will help move us toward a clear resolution. That’s a lot to wish for.

  • Great topic. Maybe someone can show me what I’m missing below.

    With the limited research I’ve done, I’ve had a hard time proving that an immediate annuity is a better choice than using tenure payments from a HECM. Purchasing the annuity significantly increases the interest expense on the RM, therefore using home equity more quickly, and doesn’t seem to increase monthly cash flow much if at all. The annuity is portable and can sometimes be inherited, but so is remaining home equity. It seems that annuities can be a great way to invest some retirement funds, but not RM proceeds.

    Deferred annuities seem to have no place being funded by a RM given the age of the borrowers.

    It seems that life and long term care insurance could potentially provide a benefit when funded by RM proceeds in some circumstances.

    “Shifting the risk to FHA” as mentioned above is certainly not what HUD had in mind when they developed this program. It will increase the overall cost of this program to the others that are using the program in the traditional way, and could place its availability at risk.

    Am I missing something??

  • Lance,

    You are absolutely right in your assessment that deferred and immediate annuities have no place being funded by a RM. You didn’t miss a thing.

    The points I made merely show what how some insurance licensed individuals see the role of annuities with reverse mortgages. In no case whatsoever should an originator sell or benefit financially from the placement of insurance products to their borrower…period. However some consumers may seek advice from an agent who is not part of the loan transaction.

    Shifting the risk to FHA would in fact increase claims and potentially jeopardize the viability of the HECM for future borrowers in my opinion.

    The bottom line is cross selling must stop in all it’s forms (even LTC or Life Insurance). To help accomplish this I would love to see insurance companies add the following to their suitability form requiring the agent to sign under the penalty of perjury.

    1. Are you acting in the capacity as a loan officer, broker or originator for a reverse mortgage for the applicant(s)?

    2. Are any portion of the premiums coming from the proceeds of a reverse mortgage or home equity?

    I’m presenting this to NAIFA and NAIC for consideration.

  • One last point. Strict adherence to the current annuity disclosure and inclusion of the fees in the TALC would certainly help but the problem is that so many of these annuity transactions are not disclosed at all. Why not consider a special disclosure whenever lump sums are considered within 90 days of a closing? An originator/senior jointly signed 1010 certification?

    This process could perhaps be managed by the closing agent at funding and by the servicer for the balance of the 90 day period? No disbursement without the additional certification and correction of the TALC?

    I hate more regs. The problem is, we need them.

    Shannon, we also have several lenders here in Florida happily announcing in public that they have alliances with Insurance agents. They must not read the same mortgagee letters we do.

  • Lance,

    With all due respect, it is unfortunate you have not looked into these matters far more deeply. As a CPA your insights would add much to the discussion.

    Everyone seems to focus on the economic and monetary issues regarding annuities but there are many other issues. For example, what happens when the annuitant passes away? If the annuity is not for a term certain, has no survivor aspects to it, and provides little or no death benefits, the economic value of the annuity at the passing away of the annuitant is little or nothing. So if the husband acquired such an annuity with a HECM (or any other reverse mortgage for that matter), the house would be mortgaged but neither the wife nor the estate would have any benefits from the annuity upon the death of the decedent, husband. Although generally unexplained, risk tolerance is a huge issue.

    Who is insuring that the annuity covenants will survive the provider in case the provider terminates or goes into bankruptcy? Talking about an appetite for risk, I know of few seniors who would even consider an annuity if such information were disclosed in an honest, open, and frank evaluation of annuity products. HECM tenure payouts have the full guarantee of FHA. Of course the same question could be asked about tenure payouts on proprietary products – who insures them?

    What about the tax bracket of the annuitant? Surely some annuitants will find annuities far more appealing than others; those in lower tax brackets will see much more in the way of cash flow from an annuity than those in higher brackets. Generally HECM proceeds will never be taxable although don’t tell that to those who originated in 2005-2007 and will terminate their RMs through foreclosure or trustee’s sale with a gain that is not entirely excluded under the limited gain from the sale of a principal residence rules.

    If reverse mortgage proceeds will ultimately be taxable, they will be far more likely to be taxable to those who use proceeds to buy annuities than those who avail themselves of tenure payments. The reason is the vast majority of HECMs terminate within 10 years of closing and the balance due on a HECM that used all available proceeds to acquire an annuity will generally be much higher than that of one that took tenure payments.

    Of course annuities are portable while HECM tenure payments are not. This is the unique value of an annuity over HECM payouts but may, in fact, be de minimis if the annuity is for a term certain.

    Even if one gets an immediate annuity, what happens if the annuitant needs more money and the only source is the annuity? Most annuities, deferred or not, have some penalty provisions in these situations. HECM tenure payments have no penalties, just the logical reduction to the ongoing tenure payments.

    Unlike you or me, one CPA wrote a book not long ago on reverse mortgages and advised that if the annuity paid more than the tenure program, get the annuity. This is absolutely the most derelict advice in print on when it is appropriate to get an annuity over tenure payouts. He gave no rational for his conclusions and admitted he knew little about annuities. It is, however, a truly great handout for the “bogus reverse mortgage originators” who sell annuities with little or no understanding of either product.

    Now a more fundamental question, what is the additional risk to FHA? As a CPA if I am advising a senior who has any amounts available in his/her credit line and if the credit line is completely drawn down, the amount then due will substantially exceed the value of the home, would I not advise my client to take out those proceeds, especially if the senior was about ready to terminate the HECM? This additional risk argument is “for the birds.” It simply does not exist. See if you can find “the additional risk to FHA.” I can’t.

    About four years ago, I was in one of my first marketing meetings on reverse mortgages. One originator stood up to proclaim the enormous benefits of selling annuities with HECMs. Of course all of the benefits were to the originator. Then from nowhere one originator who was trying to convince the world that there is a calculable ROI (return on investment) from “investing” in HECMs jumped to his feet to say he was licensed to sell annuities. When asked what products he was licensed to sell, he said: “I don’t remember but if the commissions are that good, I want to be in on it.” Telling, isn’t it?

  • Shannon’s comments are one of the many reasons I admire him so much. If he is wrong he steps up to the table and says so. I also appreciate his thoughts on the conflict of interest issue. This is probably the most egregious and irresponsible aspects of cross-selling.

    The problem with the article above and its quotes and comments are — they are dealing with different provisions of HERA. Subsection 255(o) of the National Housing Act was added by HERA 2122(a)(9). The article paraphrases that subsection and then despicably treats the paraphrase as if it were a quotation of law. I agree with the paraphrase but not that it was treated as a direct quotation of Subsection 255(o).

    Subsection 255(o) has nothing to do with HERA’s requirements on originators. Neither the law nor HUD addresses firewalls or requirements on originators as to Subsection 255(o). This subsection is a prohibition on the required purchase of other products when originating HECMs and that is all it is.

    No mortgagee letter addresses Subsection 255(o). I am not an attorney nor am I so experienced in the industry as to know if HUD has to do one single thing in the way of implementing Subsection 255(o) in order for it to be fully enforceable. In all likelihood this provision became enforceable when it was enacted, July 30, 2008. I would love to hear from HUD’s Inspector General (IG) as to the IG’s opinion on whether any mortgagee letter must be implemented in order for the IG’s office to act IMMEDIATELY against those who violate Subsection 255(o). I have emailed Peter Bell asking him to opine on this subject.

    It is new Subsection 255(n)(1) of the National Housing Act which was also added by HERA Section 2122(a)(9) that addresses requirements on originators and attacks cross-selling by looking at the activities in which originators may be involved. This subsection and HUD Mortgagee Letter 2008-24 deal with who can originate; it also provides for firewalls. As many know already, it was Subsection 255(n)(2) and Mortgagee Letter 2008-24 that eliminated the — so euphemistically named — “HECM Advisor Program”.

    The first paragraph of the article looks like it focuses on Subsection 255(o) and remarkably the discussion quickly devolves from there into a spirited discussion of Subsection 255(n). Unfortunately the author makes it appear that a chief compliance officer (CCO) of a lender is leading the way; I just hope the CCO was not misinformed about the topic.

    Mr. Morse introduced the subject but appears to have misdirected or have been misdirected into an entirely different area of HERA. HERA has a two pronged attack against cross selling, Subsection 255(n)(1) and Subsection 255(o) of the National Housing Act. These subsections are also codified as 12 USC Section 1715z–20(n)(1) and (o).

    Anyone violating Subsection 255(o) should be reported to HUD immediately. Not only that but if anyone is selling annuities in the state of California with any type of reverse mortgage in violation of California Civil Code 1923.2(i) that person should be immediately reported to either the California Department of Real Estate or the Department of Corporations depending on how the employer of the violator is licensed in California. I wish the quoted CCO had stated this; she should have. But then maybe she did and Mr. Morse failed to publish her complete statement. Who knows?

  • To everyone in this comment chain, thanks for the in depth comments and sincere, thoughtful, accurate details you brought to the table. God reading to help inprove my day to day originations.

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