New Research Shows Retirees Earn Poor Marks for Reverse Mortgage Literacy

In the reverse mortgage industry, it isn’t too far of a stretch to attribute a lack of awareness and understanding to the miniscule penetration rate of eligible American homeowners who can benefit from a Home Equity Conversion Mortgage, but don’t because they either know little about the product or they are guided by misinformed perceptions.

Consumer ignorance traps reverse mortgages within a vicious circle, where a lack of knowledge often feeds into common misperceptions of the loan product and, ultimately, hinders the willingness to learn more about the true functions of HECMs.

The truth is the vast majority of older adults don’t know a lot about home equity use in retirement, let alone HECMs, according to the results of a recent survey that gauged the knowledge levels of those nearing or in retirement with regards to reverse mortgages.

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Of a total of 1,003 people between ages 55-75, roughly 70% failed a retirement income literacy quiz on reverse mortgages administered by The American College, along with help from Greenwald & Associates.

For this survey, The American College garnered responses from 537 males and 466 females who had at least $100,000 in investable assets and $100,000 in home equity. Their knowledge was tested through a quiz comprised of 10 true/false questions relating to reverse mortgages. The quiz questions were created by College professors and reviewed by industry experts to ensure accuracy.

Only 30% of survey respondents were able to score a 70% on the quiz—the minimum passing score. Meanwhile, roughly 40% of respondents answered 4-6 quiz questions correctly, while 30% answered correctly for three or less questions.

The average score amongst survey respondents was 4.8 out of 10 questions, with men scoring 5.4 and women 4.1.

“The survey responses show that many people moving into retirement with some home equity do not fully understand reverse mortgages, including those individuals that have reviewed reverse mortgages as a potential income source,” remarked Jamie Hopkins, professor of taxation at The American College, and one of the survey’s lead researchers.

Respondents varied in terms of their retirement preparedness, housing wealth, as well as age and sex. Among the total number of participants, 44% had a comprehensive written retirement plan in place, whereas 60% had a financial adviser. As for housing wealth, 19% reported having home equity of $500,000 or more, while 30% had between $100,000-$200,000 in home equity.

Less than a third of survey respondents answered correctly to two of the most common reverse mortgage misconceptions outlined in the quiz, respectively.

About 27% of adults understood that using a reverse mortgage early in retirement to support a retirement plan is better than as a last resort towards the end of retirement; whereas just 25% understood that heirs do not have to repay the reverse mortgage loan balance “above and beyond” the home’s value.

On a more widespread basis, 71% of respondents knew that a lump sum wasn’t the only form of payment option for a reverse mortgage; and 69% knew that they could enter into a reverse mortgage before their home was fully paid off.

Among the more than 1,000 adults ages 55-75 that were surveyed, Hopkins noted that only a single person had engaged in a reverse mortgage, acknowledging that the age range of adults surveyed limited the sample for potential age-qualified reverse mortgage borrowers who might be 62 or older.

Although retirement income planning is “extraordinarily” challenging, Hopkins noted, requiring financial advisers to manage a variety of client risks, legal changes and ethical issues when developing a financial plan, a reverse mortgage can be one effective piece of the planning puzzle.

“While a reverse mortgage is not the right solution for every retiree, it can be a helpful retirement income tool,” Hopkins said. “Reverse mortgages really are safer and more suitable products now than they have ever been in the past.”

Not only can a reverse mortgage diversify home equity, transforming this otherwise illiquid asset into an extra source of funding, but reverse mortgages can also help retirees build in a non-market correlated source of income to help offset market and sequence of returns risk.

“Financial advisers and retirees need to at least consider home equity as part of a retirement income plan and consumers need to better understand the features and uses of reverse mortgages,” Hopkins said.

View the research.

Written by Jason Oliva

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  • I hope every marketing division takes a good long hard look at this report. What ever external forces this industry points its finger at as excuses for the lack of knowledge out there about HECM’s….there are three fingers pointed back at the industry.

  • Should we expect to see a lot of knowledge about reverse mortgages from those surveyed? Absolutely not. The rest of this comment is intended to justify that position.

    Those surveyed are described as having a minimum asset base, of at least $100,000 in home equity and another minimum $100,000 in other investable assets. There is no indication if the home equity had to meet a minimum base of at least 40% when compared to the home value of the related home. Of course worst of all, there is no indication that the demographic information described in the survey report was even validated.

    There are about 28 million in the US population between 55 and 62 and another 29 million between 62 and 75. All of those surveyed were Baby Boomers except those most of those over 69 years old. Yet we cannot make any logic tests about those surveyed based on age, since we were told that those surveyed had to meet a minimum asset owned criteria.

    Now we could spend a lot of time to see how the numbers were developed but there have at least 1.6 million (see below for that information) who have either signed an application, taken counseling, or both and are living today. Since the age of the average youngest borrower has historically been 72 to 76, by now most living borrowers and past borrowers would no longer be less than 76 years old and thus were not eligible to be surveyed. So on that criteria alone most of 1.6 million were disqualified from participating. Based on the minimum asset criteria most likely at least another 50% of those who meet the age range has to be eliminated.

    Many of us have held workshops and other meetings on HECMs and most attending did not sign an application or go through counseling. We also know that many attendees came for reasons other than hearing about reverse mortgages. So maybe 25% can reasonably be expected to retain the information they received in those meetings for more than a few months. But how many of those would meet the asset minimum requirements and age range requirement to take the survey at the time it was given? Maybe one hundred thousand at the most?

    Our industry is small and despite Senator Thompson, Mr. James Garner, and Mr. Pat Boone, our ads are not intended to educate seniors on reverse mortgages but rather to make them attractive enough that seniors will call us to find out more about HECMs. How can it be expected that based on the criteria used to select those who were surveyed, that any significant percentage of those surveyed would know much at all about HECMs?

    HOW 1.6 MILLION WAS ESTIMATED

    First we know that there have been almost 1,000,000 endorsements meaning that there have been at least 1,000,000 borrowers and when considering married couple borrowers, the number of borrowers rises to something closer to 1.3 million. We also know that about 300,000 applications with case numbers assigned (meaning the applicants had both signed a completed application and counseling); bringing in spouses who also were co-applicants, the number rises to about 400,000. So far we are at 1.7 million who have at least signed an application AND received counseling.

    It is generally claimed that about 5% of those who take counseling do not proceed to case number assignment making up another 100,000 counselees only. We have no idea how many start an application and never get counseling. But let us say for the sake of argument, at least 200,000 have gone completely through originator education which brings us to 2 million. BUT we have to subtract the number of these folks who have passed away or are mentally incompetent today and let us say that is about 400,000 of the 2 million so that 1.6 million living seniors have received some level of significant education on HECMs.

  • The article is an eye opener as well an embarrassment for our industry. Bob Green said it all when he said we should all be looking at this report real hard!

    I have been in the reverse mortgage space now going on 20 years. Since 2010 I have been doing consulting for various banks and mortgage bankers around the country.

    I am not going to mention any names but on one of my consulting assignments was for a newly formed reverse mortgage division of a well established company.

    This company I am referring to is a mortgage banker, been in business close to 25 years, primarily in the traditional lending arena. One of my priorities were to put in place a very thorough training program. Part of what i was putting together was for any new loan originator joining the company. The LO would have to take a rigid training course and pass an exam at the end of the course. The training program was part of the boarding process, regardless of how many years he or she was in the business. I had also tried to couple the required initial training program with an on going training/refresher course for all LO’s and personnel.

    Would you believe that I had more flack from upper management than you could imagine. Their philosophy was, “If we hire an experienced loan originator, they should not need any training”!

    Here is a company, well established, well known but yet this was their attitude toward taking the time to train their people properly to not only represent them and their reputation in the market place but more important, for our senior clients!

    What I just described is happening throughout our industry, instead of investing the time and money in training people the way they need to be trained, to many companies want to take the quick and easy way out! Many of these firms want to just bring in the loans, bring in the dollars and turn those LO’s as fast as they can!!

    We then see rep[orts like this one that Jason wrote, we have to ask ourselves, why? Just like Bob Green said below:

    “What ever external forces this industry points its finger at as excuses for the lack of knowledge out there about HECM’s….there are three fingers pointed back at the industry”

    What ever happened with going out and putting on educational workshops at senior recreational centers or workshops in conjunction with the departments on aging with various municipalities?

    Here is a better one, what happened with the days when we would team up with an elder law attorney, and a financial planner who dealt primarily with seniors? Teaming up with them and putting on an entire community educational workshop for seniors and their families to attend. My Goodness, if done properly you could get the local newspapers, radio stations and the city to sponsor the event. This is what I call educating our seniors! I know, I used to do it and many of you reading this did it years ago!

    If we all did these things around the country in unity, today, it would work. We then become real educators for our seniors about a reverse mortgage. The greatest gift we will be giving to thousands of seniors around the country would be to fulfill and improve their quality of life in their retirement years!

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

    • John,

      What is all of the concern about?

      I think you and Mr. Green have not had enough time to look over the demographics of the those surveyed. Most of us who were in the business before 2013 focused on those who were cash poor not those with at least $100,000 of investable assets besides pensions which all of the participants were required to have.

      No one over 75 was even eligible for selection. Most of my prospects over the years were in their late sixties and young seventies so there was no possibility any of them could have been selected.

      One trouble with the quiz was that it was supposed to be about retirement INCOME when it fact is was about debt. How is 70% a reasonable passing score based on a subject for those between 55 and 62 few would have much interest in. 40% of those surveyed did not meet the minimum age to get a HECM. Only one had any experience with reverse mortgages and there is no indication if the majority of the 1,003 surveyed lived in one MSA where the dominant form of home ownership is a coop or if average home equity was 40% of the value of the home, 70% or some other average percentage.

      Now that the industry is focusing on those who are among the mass affluent, we should see better results for those who are eligible to obtain a HECM over the next decade. There is far too little information known about the demographics of those selected to feel as if we are at fault for their lack of their education. Now if these people had all attended our seminars or counseling, we should be upset with ourselves but this is a poor survey to discern how effective we have been as educators or marketers.

      Give it another decade and if the results are as bad as now, we will need to be strongly exhorted but not for those under 60.

      It was a useful survey for financial retirement planners. It also shows the work our industry has in front of us despite a higher percentage of the mass affluent having a financial planner or a written retirement plan.

      Overall the survey was insightful but could have even more helpful had more information been provided about those surveyed.

      Have a great evening, John.

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