Claiming that high origination fees and complicated terms make reverse mortgages too risky for most older borrowers, a prominent economist suggested in a recent newspaper column that homeowners who need to tap into home equity use an annuity-based strategy instead.
The Department of Housing and Urban Development is hiding a better option than the reverse mortgage from consumers, Boston University economics professor and financial planner Laurence Kotlikoff wrote in a Monday column that appeared in the Seattle Times. The Home Equity Conversion Mortgage program, Kotlikoff claims, buries potential borrowers in fees and confusing terms that even a counseling session can’t sort out.
Kotlikoff starts with a basic overview of the HECM, calling the product an IOU from the borrowers — which he calls the Smiths — to their lender. In the columnist’s opinion, the only scenario in which the Smiths come out ahead is if they have no heirs and die at home.
“But if they die with heirs, or if they need to move to a nursing home or near their children, the Smiths’ share of the proceeds from their house’s sale becomes a big deal,” Kotlikoff writes. “This share can be quite small, for many reasons.”
He then lists high interest rates, the adjustable-rate feature of some HECMs, and the “five different fees, some huge” associated with originating the mortgage as reasons why the Smiths may not end up with a significant quantity of cash after the sale of the home.
“These potentially high rates and huge fees don’t cost the Smiths anything until their exit day,” he writes. “As a result, they may pay little attention to what is owed.”
Kotlikoff — who mounted an independent write-in campaign for president in 2016 with running mate Ed Leamer, another economics professor — then goes on to accuse HUD of providing insufficient information on its website, and claims that the mortgage counseling process won’t help untangle the fine-print knots.
“There, potential customers doubtless have their heads spun with talk of adjustable ‘Libor rates,’ ‘annual insurance premiums,’ plus the various fees,” Kotlikoff writes.
Instead, the professor recommends what he calls a “home-rolled” reverse mortgage, in which the borrower obtains a regular fixed forward mortgage, then spends the proceeds on fixed annuities that pay a higher rate than the mortgage loan. While he notes that this strategy also could potentially leave heirs in the lurch, he recommends giving “gifts to heirs through time,” and also suggests purchasing annuities from multiple insurers to spread out the risk of one or two issuers going out of business.
“No, they won’t get nearly as much immediate ‘free’ money. But they won’t get ripped off,” Kotlikoff concludes.
Read the full column at the Seattle Times.
Written by Alex Spanko