Forbes: These Stigmas Give Reverse Mortgages a Bad Reputation

In the reverse mortgage industry, there is a widely held belief that Home Equity Conversion Mortgages suffer from a bad reputation, one that is largely characterized by a gross misunderstanding of the product by the general public as well as financial professionals.

But just why do reverse mortgages have such a bad rep? There reality is there are several stigmas preventing many people from seriously considering reverse mortgages as a practical retirement tool, according to a recent Forbes article.

“Some aspects of that bad reputation are based on misunderstandings, some aspects were true in the past but have since been mitigated, and some aspects may still remain,” writes frequent Forbes contributor, Wade Pfau, director of retirement research at McLean Asset Management in McLean, Va., and professor of retirement income at The American College in Bryn Mawr, Pa.

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Although recent research published since 2012 has been generating more interest from financial planners, Pfau included, reverse mortgages still retain a bad rep with much of the general public and significant portions of the financial services industry, he writes.

Part of reason reverse mortgages have developed a bad rep, Pfau suggests, is because of the temptation they provide to more quickly deplete a person’s asset base, thus creating financial hardships later in retirement.

While some of the major stigmas regarding reverse mortgages are the result of this idea of spending down assets too quickly, family misunderstandings, issues with non-borrowing spouses and misconceptions about what happens to the borrower’s home title, others are more complex on a psychological level.

“Psychologically, individuals may be challenged by the idea of using a debt instrument in retirement after having spent their careers working to reduce their debt,” Pfau writes. “This is a psychological constraint against using reverse mortgages.”

Read more about the other stigmas plaguing reverse mortgages at Forbes.

Written by Jason Oliva

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  • Dr. Pfau hit on one of the main problems with reverse mortgages, the lottery winner syndrome, i.e., the lottery winner’s (or the borrower’s) tendency to spend the proceeds from the reverse mortgage rapidly with little prudence and a lot of poor decision making. Over and over again originators have complained about the idea that borrowers should seek competent advice from well respected members of their local financial planning community. The usual line is that they lack the money to do that when the response should be how can they afford not to do it?

    Unfortunately Dr. Pfau like so many others does not understand how a reverse mortgage is nonrecourse. If the MIP is what makes HECMs nonrecourse then he has every right to say: ” I also have concerns about whether the mortgage insurance premiums collected by the government will be sufficient to cover the non-recourse aspects of the reverse mortgage.” But that quotation shows how little so many understand the nonrecourse nature of a reverse mortgage.

    Reverse mortgages are nonrecourse because the loan documents state that they are which includes HECMs. On top of that Federal law also defines all reverse mortgage transactions as nonrecourse transactions. The industry has become so used to using false explanations as to the high cost of MIP on HECMs that it has now become the truth, i.e., the lie is the truth. The reason for the high cost of MIP is to reimburse HECM lenders on losses they will inevitably incur due to the low interest rates and high principal limit factors offered on HECMs.

    When discussing non-borrowing spouses Dr. Pfau states: “Lending limits will be based on their age to help protect the insurance fund.” Again Dr. Pfau shows his limited understanding of HECMs since lending limits are not based on age. It is principal limit factors that are based on age but they are also based on the expected interest rate as well.

    Just because our new friends within the financial advising community are grasping the value of HECMs in financial planning that does not mean they fully understand HECMs. We need to patiently read what they write, listen carefully to what they say, and where it does not matter give the the benefit of the doubt but we should also work with them so that they can grow and gain an ever deeper understanding of HECMs.

  • Interesting discussion and article. I find some of what Dr. Pfau has stated carries some validity but surly not all of it, that’s for sure.

    I read my friend The_Cynic’s comment, I agree with most of it. I realize Dr. Pfau did not mention nonrecourse per say but The_Cynic brings up very good points about this benefit.

    What is concerning me about Dr. Pfau statements are they are not followed through with. Take this statement below:

    “Part of reason reverse mortgages have developed a bad rep, Pfau suggests, is because of the temptation they provide to more quickly deplete a person’s asset base, thus creating financial hardships later in retirement”

    What basis does the doctor have for saying that. At the time the reverse mortgage was taken out, circumstances may have been such that the reverse mortgage was the only alternative the senior had at the time. Or it served the purpose of an emergency situation, no one knows, especially for the doctor to put this in the minds of our seniors!

    Also, the product itself can’t be responsible for as an example, a bad loan officers intentions, which we all know that unfortunately interferes with the credibility of the entire lending and financial world.

    There are other statements Dr. Pfau makes, such as the one below:

    “Psychologically, individuals may be challenged by the idea of using a debt instrument in retirement after having spent their careers working to reduce their debt,” Pfau writes. “This is a psychological constraint against using reverse mortgages.”

    Yes, he is theoretically right but as I stated in a comment in another article Jason wrote, the American dream of the past was to own a home and paying off the mortgage as fast as one could. Unfortunately for many, that dream is not realized in this day of age anymore.

    Most seniors who take out a reverse mortgage, providing they are taking it out for the right reason, are not looking at it as debt but additional income because they were relieved of monthly payments in real dollars.

    As I also stated in other comments I have made, a great deal of the seniors that take out a reverse mortgage don’t consider it a debt like Dr. Pfau is looking at it to be. They look at it as they do not have the monthly payment obligation anymore, they don’t have to worry about where they are going to get the dollars each month to make the mortgage payment or medical bill payment!

    If a loan officer has done his or her job with our seniors best interest at heart and the counselor did their job properly, our senior should be placed in a position of having a better quality of life. I feel if we accomplished this for the senior and their family, we did our job the way it should have been done!

    The bad reputation of our product mainly comes from the news media and people like Dr’ Pfau who writes articles like this that really do not understand what good the HECM does for seniors today!!

    John A. Smaldone
    http://www.hanover-financial.com

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