Urban Institute Researchers on Who’s Afraid of Reverse Mortgages

Last week, Urban Institute researchers Karan Kaul and Laurie Goodman released a detailed report on the reasons why older Americans aren’t considering their home equity as an essential retirement asset. As RMD reported, the pair found a wide variety of factors that stop people from using reverse mortgages, home equity lines of credit, and other similar financial tools, from fear to misunderstanding to deep-seated behavioral patterns.

In order to find out more, RMD spoke with Kaul and Goodman by phone last week. This interview has been condensed and edited for clarity.

What are the most prominent reasons why seniors are reluctant to tap into home equity?

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Kaul: The main reason, as we pointed out in the report, is that they just don’t want it. They just don’t want to extract equity from their homes. They just don’t want to have debt, for the reasons we mention in the report.

Having said that, there are also these structural barriers to the extraction that have to do with things like tight credit, or having not a good understanding of how these products work, or misinformation, complexity. … But again, the big elephant in the room is that they just don’t want debt. And I’m not sure anything could be done because a lot of it is driven by their behaviors and their inherent attitudes, and those are things that are really difficult to change.

A lot of people in the reverse mortgage space say it’s a generational issue — there’s a long-standing fear of debt among older Americans, either because they may have grown up during the Depression, or because they thought their homes were something to pay off, not a source of money.

Goodman: And the other thing to bear in mind is that this generation has a lot of equity that could be tapped, and for some reason, tapping home equity is considered a measure of desperation rather than a legitimate retirement tool by many. And sort of moving the various products that can be used to tap equity into retirement planning, I think, is one of the most powerful suggestions we make in this paper.

Why do you think there’s a perception that the reverse mortgage is more complicated than other financial tools? Home equity lines of credit, and even forward mortgages, are also relatively complex products.

Kaul: I think the main reason for that is that most people don’t even think about reverse mortgages until they approach retirement age or are already well into their retirement years — unlike other products like stocks and bonds and annuities and forward mortgages, which most people get familiar with in their 20s and 30s and 40s. So if you’re talking to someone who’s in their 60s, and you introduce this entirely new concept of reverse mortgages … it’s just really hard for them to understand this product at this age. If they had been introduced to this product when they were younger, there is a chance that they would have a better understanding of this product from a younger age, and therefore [there would be] less skepticism when they are finally in their retirement. That may just increase the likelihood that they would eventually use it.

And the other problem is the misinformation and fraud that just scares a lot of people. They just don’t want to have anything to do it unless they’re really desperate, and so they just try to stay away from it unless they really, really have to get into it.

Goodman: Most of our parents had mortgages. It’s a product they’ve used, know what it is, from a very early age. You understand that payments have to be made, et cetera. And reverse mortgages are a far newer product and a much less used one.

[A Fannie Mae survey asked asked] what, if anything, concerns you the most about reverse mortgages? If you take out “none of the above,” 20 percent of the people said they were afraid of getting scammed. And I think part of that reflects the fact that the reputation of the industry hasn’t been great. Moreover, the participants in this industry are by and large not household names. They will eventually become household names as this product continues to grow, but that’s just a learning curve for everyone. Out of the top four lenders in this business, most homeowners have heard of zero.

Goodman: It’s such a legitimate retirement product, and it’s just so underutilized. I have a ton of friends who are taking retirement at 62 and are beginning to take Social Security. And I’m thinking: “You dummy! Retire at 62, but then take Social Security when you’re 70 and use all the home equity you’ve built in your home to live off of for your next eight years because your life expectancy is another 30 years, and you will be so much better off rather than taking the reduced payment.

In your research, you recommend instituting a draw period and a repayment period for HECM loans, similar to home equity lines of credit. Is it more about simplifying the system, or reducing potential costs?

Goodman: Both. But it’s more about reducing the costs by reducing the risk.

Kaul: When a borrower gets a reverse mortgage today, the line of credit option, the line of credit pretty much stays open. There’s no end date to it unless they sell the home or they die. So what that does is it creates uncertainty for lenders. They have no idea if the borrower will tap their line today, five years from today, or 15 years from today. So they have got to assume that a certain percentage of borrowers will tap into that equity at some point, and that factors into their pricing decisions. And so one of the things we think would happen if one were to put a term limit on that line of credit, it would give lenders more certainty that after that limit has passed, five years or ten years, they could finally release whatever liquidity they had to keep behind it in order to fund those lines at some point in the future. Just a way for lenders reduce their uncertainty, and the hope is that once that uncertainty goes down, then lenders will not have to price for that uncertainty, and that might end up reducing the cost a little bit.

What are the most important suggestions you made in the report?

Goodman: The two most important, in my view, are making it a more vital part of reitrement planning, and somehow reducing the marketing costs. A huge amount of the cost of these loans are just marketing costs. Whether it’s fewer participants who do more of this product or what, reducing the marketing cost would help lower the cost structure substantially, which would substantially improve the product.

Kaul: I totally agree with those two. As Laurie mentioned, the marketing costs for the loans are high because you just have an industry that is extremely fragmented compared to what we had back in ’07 and ’08. So you have smaller players who are originating fewer loans, and the fixed costs are spread out over those fewer loans, so the loan cost goes up.

The one thing I would add is counseling. A lot of the onus about educating reverse mortgage borrowers right now lies on the companies making these loans. There is HECM counseling available, but there are ways to improve that by counseling based on borrower needs. So if you have a high-income borrower who has a lot of equity their home and wants to tap into reverse mortgages, you could tailor that counseling toward making sure that the borrower gets a reverse mortgage only if they really need it. On the other hand, if a lower-income borrower —  who perhaps has limited income, limited assets, limited savings — if they decide to go for a reverse mortgage, you may want to focus the counseling more on effective coping strategies and how to minimize borrowing and how to minimize their cost of living to better educate them about what might be in their best interest.

Written by Alex Spanko

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  • This was a very interesting article and well presented, very different than the norm!

    The entire article stems around one sentence:

    “What are the most prominent reasons why seniors are reluctant to tap into home equity”? Or should I say fear the word, “Reverse Mortgage”??

    Very good points were knocked back and forth by Karan Kaul and Laurie Goodman. However, let’s face it, are not we in the industry the blame for much of this?

    How many loan officers getting into the reverse mortgage space today are getting into it for the right reason, is it the money? I think a lot of that is the case. I have talked to many people entering into the business or maybe have been in it for 3 or 4 years. Many of the people I have talked to have no prior forward lending experience or any lending experience at all. Some have even said to me, my interest is to see as many prospect as I can, when the application is taken, I then rely on the processor to do a lot of the leg work!

    This is bad thinking and what is even worse is that a lot of companies out there are looking to bring in as many loan officers they can, just to put numbers on the books! Does that what our seniors meant to us today, numbers?

    The point I am getting at is we may be scaring many seniors away, it may not necessarily mean they do not want to tap into their home equity, it may mean they are scared to and don’t understand why or how a HECM could do so much for them! Especially if the seniors we are talking about are living in the last home of their dreams.

    I am saying pure and simple that when we find a senior interested in knowing about a reverse mortgage, we need to take the approach, before anything else to first and foremost to uncover what their true need is for inquiring about a reverse mortgage. Once the need is discovered, many things can now fall in place.

    Along with that goes the word trust! Our seniors MUST trust us, trust the loan officer they are working with. The best way to gain any seniors trust is by the loan originator to have the patience with our seniors and have plenty of knowledge to answer their questions truthfully and with confidence!

    Many companies are not investing the time and money in training their loan originators the way they need to be trained. A loan officer today needs to understand the in’s and out’s of a reverse mortgage. They need to understand everything they can about FA!

    And last but not least, the loan officer of today needs to know what their responsibilities are to the prospective senior borrower, the processor that will be handling the loan and to the company they are employed by! In short, many loan officers need to know what taking a complete and proper application is all about before turning a loan in for processing!

    We as an industry need to be focusing more and going after the professional financial planner, advisors, accountants, attorneys, small community banks and credit unions. If we can gain their trust in us enough to send their clients to us, we will find a completely different willing client and one that a major trust barrier has been automatically lifted! However, mark my words, in order to deal with these professionals, we need to be professionals and extremely knowledgeable about our product!

    In closing, I feel very confident in what I am saying, when I say, much of the blame in the drop in business and the lack of confidence seniors have in the HECM is due to us in our industry!

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

  • Until there is a serious suitability test to determine if a reverse mortgage is beneficial or harmful for the borrower over the long term a reverse mortgage is all risk. This is a time in life when money is going out rather than coming in. It is way less risk and stress to determine how a reverse mortgage will impact your life before you get one rather than the impossible task of trying to get out of one later. OR (and I don’t think this is every going to happen)
    When a counselor has liability for telling the consumer if a reverse mortgage is right or wrong that could offer some protection.

    I have worked with thousands of consumers who are in foreclosure through no fault of their own because they had no method of determining if it was the right financial product before signing on the dotted line.
    If you don’t know the impact of a reverse mortgage 5, 10, 20 or 30 years down the line don’t do it!
    And just one more comment here. I can’t think of any situation where at 62 or in your 60’s you would get a reverse mortgage unless you know what your health, financial circumstances and personal needs will be and how they will be met 10, 20, or 30 years from now.

    • Hello Sandy, You said,”I can’t think of any situation where at 62…you would get a reverse mortgage…” Almost no one knows what their health, financial circumstances and/or personal needs will be for sure in ten years let alone in thirty years. Taking out a reverse mortgage at 62 to establish a line of credit that grows every month makes sense to me. If the need arises later in life to pay for some unexpected expense(s) the funds will be there. As time goes by the senior may not be able to get a reverse mortgage later in life due to program changes and especially if AARP gets their way and has the growth feature eliminated by HUD. It is better to have the reverse mortgage available and not need it than to need a reverse mortgage and not have one. Have a good day!

      • Hello Mike,
        Taking out a line of credit at 62 also has compounding interest that continues to grow. I think we disagree on when is the best time to take a reverse mortgage. Since no one knows what life changes will happen in 10, 20 years or longer to me it’s even more important for someone in their 60’s to make sure the loan is right for them in the future. I am all for reverse mortgages when they are the right product Thanks!

    • Ms. Jolly,
      It is hard to find a place to start with your comments, but I will try. You state without a serious suitability test to determine long term effect a reverse mortgage is all risk, what financial decision made in life regardless of one’s age and which program comes without risk? Sure if you could see in the future it would be easy to pick and choose what decisions to make but that is impossible. You state “It is way less risk and stress to determine how a reverse mortgage will impact your life before you get one rather than the impossible task of trying to get out of one later” of course it is! That is why trained and LICENCED professionals go over all of the details of the loan before a reverse loan is taken out. That is why borrowers must go through 3rd party reverse mortgage counseling with trained professionals to make sure they understand completely how the loan works, both the benefits AND the risks involved. If a loan officer has not done their job in explaining it or has miss led the borrowers in any way it will come out in the counseling session.
      You then state that if a counselor has liability for telling them if they a reverse is right or wrong for them that would offer protection-That is ridicules, no one should tell anyone what they should or shouldn’t do. Your statements imply that normal everyday people that are over the age of 62 are not capable of making their own decisions based on their own research and knowledge, that they should rely on other people and some kind of test to decide what is right and what is wrong for them. There is not enough training, certification, or degrees in the world that would make someone qualified to make that judgment.
      One reason our industry is working with the financial planning industry is because they are the ones that are working for the borrower’s future needs and trying to help put them the best position possible for their retirement years. These are professionals that go through extremely difficult training, testing, certification and vetting. But even they do not and should not tell their customers what they should do.
      You state you have worked with thousands of consumers who are in foreclosure through no fault of their own because they have no method to help them determine if a financial product was right for them or not. What you do not say is why they are in foreclosure, are you saying it is because they took out a reverse mortgage? Did they pay their taxes and insurance like you still have to do even if you do not have a mortgage at all? First of all it is everyone’s own responsibility to do whatever research is necessary to determine what may or may not be right for themselves. Especially in this day and age where there is information readily available from so many sources it actually could be found that it IS a person’s own fault for being in foreclosure or whatever other financial trouble they may be in because they did not do their own due-diligence. Everyone has a responsibility to themselves. That being said, do people make mistakes, do they get bad advice, absolutely! But this does not mean we take away peoples responsibility to think for themselves and make their own decisions. Education has always been the key to whether something is right or wrong and education on reverse mortgages is no different.
      Lastly you state “If you don’t know the impact of a reverse mortgage 5, 10, 20 or 30 years down the line don’t do it! I can’t think of any situation where at 62 or in your 60’s you would get a reverse mortgage unless you know what your health, financial circumstances and personal needs will be and how they will be met 10, 20, or 30 years from now” This just goes to prove the point of how important it is to work with experienced, trained, licensed, and supervised professional to help plan for what the future may hold. To say if you don’t know the future then don’t do something is absurd and very poor advice. Planning ones future, whether it includes a reverse mortgage or not, is the wise thing to do. And just because you cannot think of one good reason to do a reverse mortgage does not mean that there are not 10 good reasons for someone to DO a reverse mortgage. Everyone’s situations and goals are different and they do change over time and some do not work out as planned. But that does not make them bad decisions because at the time it might have been the best option. Sitting and doing nothing is always one of those options.

    • I am over 62 and am intelligent enough to make my own decisions. I have talked with financial advisors who offered options for my future planning but it remains my decision. For health issues doctors provide options, I then choose which options think are best for me. Just because we are 62 or over doesn’t make us dumb!

      Who is counseling or consulting people when they open credit cards, buy a car, a new TV, appliances, etc? Maybe when they made the choice on these decisions it made sense but then “life happened”
      with loss of health or a job. We don’t have a crystal ball to predict the future whether it’s deciding to do a reverse mortgage or any other choice.

      I have had prospective borrowers ask me if they should do the RM. My response is that they have to
      make the decision based on what they feel is right for them; it’s not mine or any third party’s decision to make. I do tell them if I feel it’s not right for them, i.e. I met with a couple and went through all the details because they said they wanted to stay in their home. At the end of providing all the information they asked what happened if they decided to move 3 months after they did the reverse mortgage. My response was to decide if they want to move before doing the reverse mortgage or they would have paid the closing costs without the long term benefits of the reverse mortgage. They didn’t do the reverse mortgage but decided to move…it was their choice.

      I once did a RM for a woman who later called asking to refinance because she needed more money because she had “used the money to help her son (a drug addict) pay cash to his doctor for cancer treatment.” I didn’t have control over how she used the reverse mortgage funds, she didn’t disclose the details or plans to assist her son to me or the reverse mortgage counselor. But when I learned why she wanted the funds from a refinance it was clear her son was taking advantage of her for his drug addiction. I referred her to sources to assist her son as well as called Adult Protection.

      To summarize, no one can predict the future and no one has the right to tell someone else what to do. People make their own decisions and are responsible for those decisions.

    • It is hard to take you seriously Sandy when you run a website called Elder Financial Terrorism that is about reverse mortgages. Do you also recommend that 62+ year olds meet a suitability test to buy/sell real estate or use another type of mortgage product? If not, why?

      It would benefit Sandy to spend some time with the majority of reverse mortgage borrowers that are happy with their decision, as are their children when they pass. That being said, it would also benefit those of our working for profit in this industry to see what she is inundated with on a daily basis and see how we can stop those issues from happening.

      We all should be better stewards of the long term health of the industry.

    • Ms. Jolley,

      It is a shame so many of us dumped on you and unfortunately I was the first.

      (About a decade ago I spent several hours on the phone with Ms. Jolley. Mr. Peter Bell as well as others did the same. Ms. Jolley has reasonable gripes about her mother’s experience with the originator who got her mother to get a HECM. She has properly complained to the right parties with little change in her mother’s situation.)

      Unlike many others, you have grounds for what you share. I wish your mother had had a different experience but that is not the case.

      So, Ms. Jolley, even though I cannot agree with many of your positions, in so many ways you honor your mother.

      One day I hope you will understand that your mother’s case seldom occurs. Yes, the industry has had its share of problems but we have also originated over a million HECMs. There are probably more borrowers and heirs who are disappointed with their HECM experience than you or I have met with BUT the total of those disappointed with HECMs are very small in relation to those who have not.

      I hope all is well with you and your family. Many in this industry still support you in the things you brought to our attention about what occurred to your mother.

  • The article was well written and covered much of what the study presented. Yet the recommendations in the study must be refuted and rebuffed. These are some of the worst recommendations we have seen in a while.

    For example, Alex correctly states: “In your research, you recommend instituting a draw period and a repayment period for HECM loans, similar to home equity lines of credit.” Why would we accept remaking the HECM into mortgage far closer to a HELOC?

    The researchers want to get rid of the growth in the line of credit, tenure payouts and term payments. Why? Just because very few borrowers select tenure and term payouts, that does not mean that these forms of payouts should be eliminated. More and more financial advisors are realizing the wisdom of these options.

    One of the researchers claims: “When a borrower gets a reverse mortgage today, the line of credit option, the line of credit pretty much stays open. There’s no end date to it unless they sell the home or they die. So what that does is it creates uncertainty for lenders.” Did the researchers actually ask lenders if this was a problem to them? HECM insurance covers this risk. Yet this is the major reason why the researchers conclude that the period to use the line of credit should a definite date with a repayment period.

    The proposals would destroy the special benefits aspect of a HECM. Is that what we believe should happen to HECMs? If you are not bothered by this study, then you need to learn how valuable a HECM can be for seniors who use the proceeds prudently and strategically to improve their retirement by way of more cash to use in retirement along with the opportunity to increase the size of the estate passed to heirs.

  • Are you serious? I will not waste my time explaining the obvious but in your far out example you state the 12 year old great grand daughter needed long term care and the grandson was asking for help. Um, that would have been a good time to tap the line of credit to help her out as I am certain the long term care was not cheap.

  • I appreciate everyone’s input and just want to say some of
    your answers were long and complex. I like to keep it simple: I am only taking about Reverse Mortgages in my comments from my experience with thousands of consumers.
    The reverse mortgage program was created to help Senior’s stay in their home. The one question above all the consumer needs the answer to “Is a reverse mortgage right (or wrong) for me and my circumstances. To me this is suitability. Until the consumer figures out if it’s right for them they don’t really need to know the program options or how the program works.

    As a community we should want to give the consumer all possible
    tools to determine if a reverse mortgage is right for them over the long term. If even 1%, 10% or more of reverse mortgages were bad decisions we can do better and should.

    Of course everyone has the right to make a bad decision as one person suggested but why would we want anyone to get a reverse mortgage if it is a bad decision? That defeats the purpose of the program.

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