FINRA Concerned About Reverse Mortgages Funding Investments

logo_foxBiz Fox News contributor Gail Buckner writes that as reverse mortgages continue to get more popular, federal regulators are taking notice.

“Reverse mortgages in the right circumstances are a good idea for people who need income,” says John Gannon, who heads up investor education at FINRA (Financial Industry Regulatory Authority), the watchdog over the brokerage industry.  “It allows them to tap into the equity in their home and pay their expenses.”

FINRA’s says it’s concerned that reverse mortgages are being marketed as a way to fund investments, not as a way to provide a needed source of additional income. 

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“We saw an increase in the number of investment professionals marketing reverse mortgages as a tool to tap into people’s assets,” said Gannon.  In these cases, he says, the seniors taking out the reverse mortgages are “not using the money for income, but are reinvesting it and hope to generate more income”.

Interesting that FINRA is acknowledging that investment professionals and not reverse mortgage professionals are marketing the loans as a way to fund investments.

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  • To add to that observation, I just got back from a CE (continuing Education) meeting hosted by Met Life. I asked if they are seeing an increase in Long Term Care Insurance (LTCI) funded through reverse mortgages. They said yes, a lot, especially out west from WF people.

  • Well, Mr. Gannon is at it again, instructing on fundamental financial concepts while trying to give a very significant and seriously important warning. His expressed understanding of reverse mortgages clouds over the issue that he attempts to address.

    1. In the May 2008 issue of the Kiplinger Retirement Report, Kathryn A. Walson quoted Mr. Gannon as saying: “A reverse mortgage shouldn't be seen as a cost-free way to enhance your lifestyle in retirement….. It's an expensive option, and people need to realize they're reducing the value of their home.” Mr. Gannon needs to learn the difference between value and equity. There is not one single reverse mortgage that has ever reduced the “value “of even one home, period.

    2. This time Mr. Gannon instructs us with: “Reverse mortgages in the right circumstances are a good idea for people who need income.” Going on from there he explains: “It allows them to tap into the equity in their home and pay their expenses.” The author, Ms. Buckner, then concludes: “FINRA’s concern is that reverse mortgages are being marketed — not as a way to provide a needed source of additional income — but as a way to fund investments.”

    What Mr. Gannon states and what Ms. Buckner concludes shows that Mr. Gannon does not understand the difference between income and debt proceeds. He needs to speak with the legislative staff of California Assemblyperson Mike Feuer (D-Los Angeles) and that of California State Senator Alan Lowenthal (D-Long Beach). After meeting with Senator Lowenthal directly and the legislative staff of both lawmakers, the product of working with these groups is legislation awaiting the signature of Governor Schwarzenegger which removes all references to reverse mortgage proceeds as “additional income.”

    3. The author then cites Mr. Gannon as saying: “Gannon advises seniors to involve ‘someone they have a relationship with and trust,’ such as an adult child or financial advisor they’ve known for while. He says people make the biggest financial mistakes when they ‘do something with someone they just met and don’t get a second opinion.’” This is great advice but he shows he has no idea about reverse mortgage counseling or what most originators recommend.

    Mr. Gannon certainly does not know how counselors and originators already encourage participation of adult children, future heirs, and trusted advisors. Please do not misunderstand, I agree with the advice of Mr. Gannon. It just would have been nice if he would have given the same advice to those seniors who invested with Mr. Madoff and Mr. Stanford.

    Does Mr. Gannon give the same warning about needing adult children and independent financial advisors when it comes to investment decision meetings with his members? Why isn’t Mr. Gannon promoting independent counseling for seniors when making investment decisions? Mr. Gannon seems better at instructing us than his own membership.

    CONCLUSIONS AND SOME ADVICE FOR MR. GANNON

    Mr. Gannon clearly has no idea about the safeguards in reverse mortgage origination, particularly HECMs. California has required significant safeguards in all reverse mortgage origination in California since mid 2006. Mr. Gannon seems to be addressing proprietary reverse mortgages which has all but disappeared in 2009.

    In discussing investment professionals the author quotes Mr. Gannon saying: “[they] are probably earning money off the reverse mortgage transaction and any investments, as well.” Being an unsophisticated student of securities dealers myself, it seems the term “investment professionals” could include not only securities licensees but also insurance licensees. I strongly urge Mr. Gannon to carefully consider what he says before he speaks. These are terrible indictments and accusations against his members and those who hold insurance licenses.

    While one can understand how some less sophisticated and learned individuals might hold and promote such ideas, why does Mr. Gannon? He should speak on what he knows, not on what he does not. He not only discredits himself but more importantly the alleged regulator and industry he represents.

    The statements of Mr. Gannon on the things covered in this comment are the very embodiment of double standards and the art of deflection. Mr. Gannon, what you would require on members of our industry, would you require them of your own????

  • Two things;

    RMs generate cash flow for the homeowner so there is no need for any investment that would do the same so such an investment is not appropriate.
    There are various insurance products that although are not designed to generate cash flow but could under certain circumstances in years to come, that can be appropriate.

    We need to be sure that the media etc. make the distinction between the two.

  • Mr. Gannon makes an excellent point. He warns: “We saw an increase in the number of investment professionals marketing reverse mortgages as a tool to tap into people’s assets.” The author quotes him saying: “you’re taking a fairly conservative asset — your home — and investing it in speculative assets. If the money is gone, what are you going to live on?”

    Recently we have seen a rash of alleged news releases about how more and more seniors are getting reverse mortgages so that their portfolios and retirement plans can recover. This is nothing more than exactly what Mr. Gannon is describing; it is just a different way of looking at the same basic issue. There is a rule of thumb among financial advisors that seniors should allocate their investments annually so that their investments in growth equities are shrinking over time. The rule states that a senior should be invested in growth equities but no greater than the difference of 100 minus his/her age divided by 100. For example a man who is 76 years old that ratio would be 0.24 or 24%. If he had total investments of $500,000, no more than $120,000 should be invested in growth equities.

    When a so called retirement specialist who sells reverse mortgages puts out news releases of this nature and provides no guidance on appropriate ratios for investments in growth stocks, you wonder about the motive. For seniors this is not news; it is a mistake about ready to happen. Generally most seniors should not be taking funds out of a less risky asset to invest in the growth equities beyond the amount indicated by the rule of thumb.

    As to this point, Mr. Gannon got it exactly right.

  • Just like any industry there are good and bad to make a general statement is not in anyones best interest. Seniors that I speak with on a whole are not stupid or ingnorant and in all cases they are educated on the downfalls of investing with the proceeds of an RM in fact they are signing papers to that effect. On the other hand they are also having counsling before the fact to make sure they have a clear picture and they are suppose to be asked by the counslor if they are going to be investing with the money. Mr, Gannon should relize that the value of the home does at no time decrease from a RM not to mention in certain circumstances the RM is a great tool for estate planning so the Government get's less when they pass away. I also beleive that if all mortgage written since 2000 would have had counseling before the fact then we would not be in the financial melt down and the bad mortgages would have beem sold less. I am so sick of uneducated people in the media and the government apeaking on issues just for attention they should het their facts straignt befoer opening their mouths

  • In this particular case Mr. Gannon is right on the money. “Reverse Mortgages under the right circumstances are a good idea for people who need income” is exactly correct in all cases.
    Upper income clients utilizing the proceeds of a reverse mortgage to maintain their lifestyle while their investment portfolios are depleted is a great option for seniors.
    Using the proceeds of a reverse mortgage to reinvest in a highly volatile market to “rebuild” their portfolio is not!
    It is time for FINRA to establish the do’s and don’ts of the uses of the reverse mortgage so their 600,000+ reps in our nation embrace this great product instead of fearing it!

  • I would never (never say never) recommend using borrowed money for speculative purposes. I would hope no RM or other financial services professional would recommend that strategy no matter how attractive the “deal” or investment sounds. My own experience was trying to borrow money from a bank to bet that the Yankees would not lose the 1976 World series in four games. They were swept by the Reds in four. Good news was, I couldn't get the loan.
    That being said, I believe that some people initiate their own problems and then “forget” and blame the bad results on someone/professional as the instigator.

  • Just a short comment to dduck12, James, floridareversemortgageguy, michael, and bigtime51
    – ditto, ditto ,ditto, ditto, ditto.

    I assisted a former RM borrower to Refi. They did a RM in 2005 and againest my advice invested the monies. they did the Refi to have over $100,000 in their LOC as a nestegg to draw on in case of emergency.

  • Duh! It is no wonder that FINRA is seeing more reverse mortgage-funded investments coming from its securities-licensed practictioners instead of reverse mortgage origfinators. Guess they didn't read the McCaskill amendment to HERA. Originators are not eager to cross-sell or even refer insurance products or securtities-based investments since that could involve them in a poorly-defined (and thus more risky) criminal act. Referring the other business out to another professional is not necessarily a shield depending upon how a regulator views your “association” with the other professional.

    That significant oversight aside, FINRA's reverse mortgage concerns are a continuation of their larger worries over ALL mortgage-funded investment dollars. Home equity dollars are viewed by FINRA and regulators as a safe asset class, but several mass-marketing outfits have taught their “trained” advisors (those who pay a fee and attend a class) to use a variety of mortgage-enabled “Equity-Stripping” strategies ranging from the inaccurate to deliberately misleading to fund new investments.

    Guess what? It didn't work out quite so well for the most of the borrowers. However, rather than an outright prohibition, FINRA informed its members (Wirehouses, Broker/Dealers, Registered Investment Advisor Companies) responsible for supervising their own individual licensees that the supervising member company would be subject to additional scrutiny and potential penalties for this type of business and violations, respectively. That additional regulatory risk lead most Broker/Dealers to restrict their representatives from the conversion of 'safe' home equity dollars to cash to fund 'at-risk' market-based investments unless the case could meet heightened consumer-protection standards. It also helped distinguish between the firms that could demonstrate specialized knowledge from the dabblers.

    Funding outside investments with reverse mortgage funds should never have been used as a mass-marketing strategy; the circumstances where it could work for the borrowers best interests are too limited. Post-HERA lenders are already prohibiting/restricting this business for the same reasons that securities firms did. However, HERA doesn't care whether the outside instrument was a securities investment or an insurance product or something else, or whether it was a suitable and advisable plan or not.

    That blanket prohibition is an unfortunate step further than FINRA took. I'd hate for the rare folks whose unusual circumstances made an outside investment a suitable and responsible approach to be prohibited from it. I believe FINRA recognized this in crafting a way to accomodate these exceptional folks and protect the majority from idiots or frauds.

    The designers of reverse mortgages deliberately built in flexibility to make the program highly adaptable to highly diverse needs. That flexibilty can become nearly as important as the loan funds themselves. Life changes, market changes, and product changes can create greater demand for what we have previously believed to be insignificant or minor.

    Prohibitions take present and future choices away from us, the lenders, and the borrowers. Congress, state Insurance and Real Estate Departments should take a page from FINRA on this one.

  • Duh, Mr. Gannon! rnrnIt is no wonder that FINRA is seeing more reverse mortgage-funded investments coming from its securities-licensed practictioners instead of reverse mortgage origfinators. Guess you didn’t read the McCaskill amendment to HERA. Originators are not eager to cross-sell or even refer insurance products or securtities-based investments since that could involve them in a poorly-defined (and thus more risky) criminal act. Mr. Gannon must also be overlooking the negative cash flow of a continuing mortgage payment, the value of an available Line of Credit balance, and the power of lump sums to meet other wants and needs that have price tags attached. His comments echo the views of those who seem to think that optimum net worth is the sole criterion for financial advisability of any plan or instrument. I’m certain he would never overlook the potential of a reverse mortgage to allow a 401(k) or IRA investment balance some time to recover without having to supply income through interest, share, or dividend liquidations.rn rnThese oversights aside, FINRA’s reverse mortgage concerns are a continuation of their larger worries over ALL mortgage-funded investment dollars which touches upon the entire mortgage industry, not just senior borrowers. Home equity dollars are viewed by FINRA and regulators as a safe asset class, but several mass-marketing outfits have taught their “trained” advisors (those who pay a fee and attend a class) to use a variety of mortgage-enabled “Equity-Stripping” strategies ranging from the inaccurate to deliberately misleading for funding new investments that could tie up and/or lose money. rnrnGuess what? Those outside investments didn’t work out quite so well for the most of the borrowers. However, rather than an outright prohibition, FINRA informed its members (Wirehouses, Broker/Dealers, Registered Investment Advisor Companies) responsible for supervising their own individual licensees that the supervising member company would be subject to additional scrutiny and potential penalties for this type of business and violations, respectively. That additional regulatory risk lead most Broker/Dealers to restrict their representatives from the conversion of ‘safe’ home equity dollars to cash to fund ‘at-risk’ market-based investments unless the case could meet heightened consumer-protection standards. FINRA also distinguished between investments at-risk of loss from other types of financial instruments. It also forced the firms that could demonstrate specialized knowledge to distinguish themselves from the dabblers.rnrnFunding outside investments with reverse mortgage funds should never have been used as a mass-marketing strategy; the circumstances where it could work for the borrowers best interests are too limited and individualized. rnrnPost-HERA lenders are already prohibiting/restricting this business for the same reasons that securities firms did. However, HERA doesn’t care whether the outside instrument was a securities investment or an insurance product or something else, or whether it was a suitable and advisable plan or not. HERA’s cross-selling prohibition was intended to prevent originators from also earning additional compensation from the potential conflict-of-interest in the sale of deferred annuities, but was generalized to prohibit other insurance or other financial products. rnrnHERA’s blanket prohibition is an unfortunate step further than FINRA took. I’d hate for the rare folks whose unusual circumstances made an outside investment a suitable and responsible approach to be prohibited from it. I believe FINRA recognized this in crafting a way to accomodate these exceptional folks and protect the majority from idiots or frauds. rnrnThe designers of reverse mortgages deliberately built in flexibility to make the program highly adaptable to highly diverse needs. That flexibilty can become nearly as important as the loan funds themselves. Life changes, market changes, and product changes can create greater demand for what we have previously believed to be insignificant or minor. rnrnProhibition takes present and future choices away from us, the lenders, and the borrowers. Congress, state Insurance and Real Estate Departments should take a page from FINRA’s regulatory approach on this one. Unfortunately, they seem to be intent to repeat Mr. Gannon’s mis-understandings and mis-statements.

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