CFPB Issues Warning on Using Reverse Mortgages to Delay Social Security

The Consumer Financial Protection Bureau issued a report Thursday with an accompanying warning stating that taking out a reverse mortgage can be an “expensive way to maximize Social Security benefits.” The Bureau also released a video and guide explaining reverse mortgages to consumers.

Issued by the agency’s Office of Older Americans, the report explores the strategy of delaying Social Security benefits through the use of a reverse mortgage, finding that the strategy carries financial risks, namely that the reverse mortgage loan costs will exceed the additional amount of lifetime Social Security benefits realized by the borrower.

“As nearly five million homeowners will turn age 62 by 2020, the Consumer Financial Protection Bureau (CFPB) is concerned that the broad promotion of this strategy could result in an increased number of homeowners borrowing a reverse mortgage for this purpose,” the report states.

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The report details the strategy in which a reverse mortgage is used to delay Social Security and shows home equity levels and costs over time under hypothetical scenarios. The Bureau finds this strategy can jeopardize retirement security by tapping into home equity prematurely and potentially reducing options for homeowners such as purchasing a smaller home later in time. The report also notes the reduced potential for borrowers to handle financial shock under the Social Security delay strategy.

“A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully,” said CFPB Director Richard Cordray in a press release. “For consumers whose main asset is their home, taking out a reverse mortgage to delay Social Security claiming may risk their financial security because the cost of the loan will likely be more than the benefit they gain.”

The CFPB finds that by age 69, those who employ the strategy starting at age 62 will pay 60% in costs for the loan for the amount borrowed, amounting to an expense that is $2,300 more, on average, than the benefits of delaying Social Security.

With the warning, the CFPB also released a video and guide explaining reverse mortgages to consumers, including a detailed question-and-answer section addressing costs, fees, non-borrowing spouse issues, loan obligations, and other elements of the loan.

Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association, objected to the CFPB’s findings in a statement to RMD.

“Taking a reverse mortgage, or any financial product, is a much more complex decision than the CFPB’s narrow account of one Social Security claiming strategy makes it out to be,” Bell said. “We will continue to support research and analysis of the value of using home equity to bridge the income gap created when Social Security claiming is delayed until Full Retirement Age or age 70.”

“We always encourage consumers to consider any financial decision as part of their comprehensive retirement financial plan, and to seek guidance from qualified individuals who are familiar with their personal situation,” Bell said.

View the CFPB’s report, video and guide via the CFPB’s website.

Written by Elizabeth Ecker

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  • A few years ago, Dr. Salter and others had hoped to deliver research showing how the benefits from delaying the start date for Social Security benefits simply by replacing initial Social Security benefits at age 62 with HECM proceeds (hereafter referred to as the HECM Social Security delay strategy) outweigh all substantial and significant risks. Where are those reports?

    The reason why there is no such report is the length of the payback period, the total risk of loss before age 70 with accrued interest and MIP, and reduced loss after age 70 until full theoretical payback is generated makes the strategy inadvisable for those with a fiduciary responsibility to their clients. For the rest of us with a responsibility to provide the best advice possible except where that advice conflicts with the adviser’s best interests are free to provide and continue providing such strategies.

    If the ethics committee at NRMLA NOW decides to create an advisory against recommending this strategy, that action will go further to empathize that the ethics in this industry is nothing more than a facade to appear as if the industry polices itself effectively in the face of regulatory crack downs against industry offenders.

    The deceit of substantial improved overall benefits for the vast majority of retirees from the HECM Social Security delay strategy is demonstrated by the lack of any solid endorsement by those who had hoped at one point years ago to provide it. This warning could easily set back the growth in referrals from the financial community and even cause it to go negative. It is and will continue to be a strike against the industry and those who have advised and no doubt, are continuing to advise the benefits of the strategy when, in fact, they have no idea how to demonstrate its effectiveness.

    • I’m sure this issue can be debated through different scenarios considering that this is not a “one size fits all” strategy. Reading the report, I’m just curious how different the numbers would’ve been if they had used more recent data and not from years prior to 2006. Some financial professionals such as Michael Lazar, Jason Oliva, Sean Bryant, Alain Valles, Tom Davison and some others, see some value to this and have written extensively about it. Either way, this should be a good topic of discussion at the next NRMLA meeting.

  • It’s very unfortunate that the CFPB based this report using numbers from a study that used figures prior to 2006. Under those circumstances, the report would have some validity but under the new plan, it makes no sense and undermines a great financial planning strategy. According to the report, the “average” closing costs which include a Servicing fee (Which we haven’t seen in a while) are about $32,000…. seriously? I hope NRMLA reviews the report and gives the CFPB some feedback to correct it.

    • In fact, they estimate the closing costs at less than $8000. Not sure where you got your figures. If anything, the authors are being generous about the costs because they are assuming the home is free and clear at the start of the reverse mortgage, making the MIP only 0.5%, rather than 2.5%. I found the study helpful and eye-opening. Nice work, CFPB!

      • Thanks for the feedback Christena, the figures I posted were in the CFPB report and my main premise was that instead of using data from 2006 as they indicated in the report, they should’ve used more current information to reflect today’s environment. I believe that on page 10 of the report, they claimed that the estimated closing costs were over $30,000 with a servicing set aside feee which we haven’t seen in a while. That’s why I mentioned the importance of using current numbers and not data that goes before 2006…. I certainly missed the part that stated that the closing costs were $8,000

      • Christena, I stand corrected. I read the report in more detail and the figures I saw were based on the expected total cost of the loan, not the actual closing costs. Thanks again for pointing that out to me.

  • The CFPB has a couple of missed points. 1)the objective for delaying SS is to wait til 70 when the payment is 132%. It is the greater monthly income which is as much of the objective as accumulated payments over the years.
    2) the costs are almost a fallacy these days when competitive pricing in many instances eliminate most if not all costs to the consumer.
    3) the example notes an accumulated interest of $127000 over 20 years. They do not calculate that amounts to approx $530/month. (÷240). Where can anyone live for that monthly cost? That is very cheap housing expense. Add to that the money not being spent monthly.. if it amounted to $800/month (x240) $192,000, the Reverse is actually saving $65000. The difference between what they are not paying and the actual cost of interest.
    4) they miss the fact of the impact the amount of monthly payment has on a retired person’s ability to live. Without a housing payment and the additional monthly income collecting SS at 70 rather than @ 62,
    there is a greater chance they can make it.

    Again the CFPB misses the main points by just looking at numbers without applying them to people’s lives and how it works in the real world.

    • Bob, I have to agree with you. The CFPB did not take into account the reality of many seniors income vs. expense monthly cash flow. I would guess to say that around 85% of the people I contact about a RM in Houston and the surrounding areas are either; running a negative cash flow or breaking even, every month and have to decide whether to pay for medications, food or living expenses.
      Yes, it would be unethical for us as Educator’s (this is indeed what we are), to solely use delaying SS benefits as a marketing tool, but if you use it this as part of an overall marketing strategy there are those candidates that this would indeed be beneficial, especially as closing costs can be compensated via YSP or SRP.
      Roberto.

    • Yea Bob for saying it as it is. What if someone at 62 CANNOT wait to take social security. What if paying off a mortgage at 62 ALLOWS them to wait until 67 1/2 or so to take social security. I really don’t think the consumers we serve will look at the CFPB’s information and say “ok we will starve for another 5 years while we wait…..” They just don’t tell the whole picture….also when did HUD require a pest inspection? Not in Texas where termites are KING!

  • There are so many different strategies so I decided to use real numbers from my own situation. I am 66 and just started collecting $2,214.00 monthly SS.

    If I delayed until age 70 I would receive $2,972.00 which is $848.00 more monthly.

    I ran an amortization schedule taking $2,124.00 monthly for the four years from a RM. (to replace/delay the SS) At the end of 4 years after closing costs and interest I would have a loan balance with the RM of $129,520.00. If I didn’t take any further money from the RM after 10 years ( age 76) my loan balance would be 182,469.00 (assuming interest rates did not rise)

    Do the math. Over a 10 year period it would cost me $80,517.00 in interest, mip and closing costs. I would have received 868.00 X 72 = $60,056.00 more from SS between ages 70-76. It would cost me almost $20,000.00 more to do the RM.

    The conclusion is for me that this is a terrible strategy. It would never pay off with compounding interest. It gets worse at age 90. This is all based on an adjustable rate not rising.

    I am no fan of the CFPB but I have to agree they are right on this one!

    • treverse – that is good for you, but you are not “everyman”. I personally don’t worry about the compounded interest and MIP. I will be living in the house til I die. If I can wait on both, I certainly would, but if I cannot, why would I care if I truly needed the funds now?

      • Ms. Hipp,

        The Social Security deferral strategy is using cash out of the available line of credit to live on in the hope getting more cash over the life of the borrower. So I do not understand your final question, “If I can wait on both, I certainly would, but if I cannot, why would I care if I truly needed the funds now?” The point is if you are living off of the proceeds of your HECM now to gain more cash flow in your eighties HOW is that needing “the funds now?”

        Are you saying that your NEED is to get cash from a HECM so that you can defer your Social Security benefits? Perhaps your need is more choice than actual current need.

  • Some HECM strategies are about maximizing “terminal wealth” – e.g., Evensky’s Stand-by HECM to protect and extend an investment portfolio – and some HECM strategies are about maximizing cash flow – e.g., SS Deferral. The CFPB is evaluating the potential benefit of the SS deferral cash flow objective against the measuring stick of the terminal wealth maximization objective – IMO it’s apples and oranges.

    It is not surprising that the SS Deferral strategy has an extended ‘breakeven’; breaking even on cost is not the objective of the strategy! One has potentially made more cash available for use during the borrowers’ lifetime, at the “expense” of leaving less for the heirs.

    I think there is a popular phrase for this: You can’t have your cake and eat it, too. Make a decision about what’s important and act accordingly, but don’t condemn an approach because it may fail to meet an objective about which a particular borrower may have no concern.

    • REVGUYJIM,

      Fundamentally, one can show how HECMs might increase net estates at demise but the primary purpose of all HECM strategies is increased assets. Those assets may be cash or equities and debt investments but assets are assets even though some may be named cash.

  • I am shocked that the government organization tasked with protecting consumers and decreasing all of the misinformation out there is now itself spreading misinformation.

    The delaying SS with a HECM strategy may be ideal for some individuals but not ideal for others. It needs to be evaluated on a case-by-case basis. The CFPB here has cherry-picked a specific case and assigned retirement goals to it that don’t align with each other and then constructed an argument against it. The exact same thing can be done in the other direction to paint the strategy in a positive light.

    The CFPB here has constructed a straw-man argument that only serves to further misinform the public.

  • “In general, the reverse mortgage loan costs exceed the cumulative increase in Social Security that homeowners would receive in their lifetime by delaying Social Security benefits.”

    We should have no problem with that statement by itself, especially using their assumptions for draw patterns, home value, and fees.

    However, there is a danger in writing guidance in generalities. We already know each financial planning strategy, individually, has the potential to assist only a portion of prospective applicants.

    So, can a case be made for this strategy? I believe so, but under very specific conditions. For example, some file for social security early because they have a very minimal budget shortfall that can be easily bridged using periodic draws from home equity. Others file because they have no liquid reserves, something that HECM LOCs can solve quickly. In other cases, the payoff of a traditional forward loan is sufficient to cure a cash flow deficiency, thereby eliminating the need for early filing. Still others may use this plan as part of a broader financial plan that includes tax liability, insurance, long-term care, etc.

    Therefore, the better question is “under what circumstances does it make sense to use home equity in a SS delay strategy?”
    In addition, we should be careful not to dismiss a “more expensive” option that may result in more financial security, spending power, or costs savings in other areas like taxes, insurance, etc.
    Our end goal is to use this tool in a way that creates value and sustainability for each individual client. While the premise in this report is something we all should ponder, the conclusion that consumers should simply continue “working past age 62” misses the point of what we are accomplishing with financial planners.

    • Dan,

      This industry even before HERA condemned the use of HECM funds to purchase deferred annuities over the risk of this strategy. The delay strategy has similar risks and the point when the reward begins to be seen is over 20 years and as long as 25 years for seniors using the payback period described by James Veale.

      We also know that deferred annuities can work in many situations but denying the questions brought up by the CFPB seems like we want to play with fire over a relatively low reward for seniors. Yes, HECM proceeds could have been used to win on the sports desk last night in Vegas as well.

      No one who supports this strategy has spoken about those who should not be using this strategy particularly those with lower life expectancies. This is in its first period, know as deferral, a total loss position with accrued costs and, perhaps, upfront costs to pay when the borrower passes away as well as the cash proceeds to repay. Even after that point, there are years in which the increased benefits will not bring overall cash inflow.

      If we found deferred annuities too risky for HECM proceeds, please explain how this strategy has less since the borrower cannot cash out the amount of benefits previously foregone in this strategy.

  • JusttheFactsMa’am,

    I am a little lost with all that self proclaimed experience and telling us “repayment is not required for this loan” and that debt proceeds are really income. Perhaps it is statements like those by someone as esteemed as you that has caused the bad reputation this product has in the eyes of the public. (By the way since there are so few other types of reverse mortgages being generated today, this reply only addresses HECMs.)

    First understand this debt IS repaid in full by either the borrower or the borrower’s estate and if the payoff is short through FHA reimbursement.

    Then understand that the proceeds from this loan are not income to the borrower that do not have to be repaid but nonrecourse mortgage proceeds that must be repaid.

    There is so much more to discuss but it would be good if you learn the first two points before I bring up more.

    • I mis spoke about repayment and meant to only address the benefits — yes benefits- of the non recourse feature and no monthly payment as it helps cash flow.

      This is a mortgage debt. All mortgages and debt and should be taken into consideration in an overall retirement plan. Many people use mortgages -reverse, HELOC, cash out – to improve cash flow and leverage their retirement income. Leveraging income can be a benefit in retirement. It is not income.

      Like you, cfpb is only looking at one part of the equation – the debt- and eliminates the human factor. Likening their suffering to a gambling play (as you did) or a consequence of debt, diminishes their humanity.

      So we end up in a circular argument where we have to come back to why we have reverse mortgage: to retain home ownership (possibly through leveraging income and paying off consumer debt). Pay property charges, maintain the property. Keep our communities alive and diverse.

      We are all operating at our highest and best level. Are there some bad operators out there? Of course! We are mortgage originators and can only recommend mortgage financial decisions. If you are recommending a legal or retirement decision without also recommending that the client talk to their attorney or financial advisor, you’re a bad operator.

      If you are a self appointed, sanctimonious “cynic” or critic, you need to meet some real people who are living in retirement with diminishing income. See if you can come up solutions for them. It’s easy to sit in an armchair and be cynical and criticize. Much harder to actually do something.

      • JusttheFactsMa’am,

        To respect seniors as humans and peers means we do not think about one thing while saying another. We say what we mean with full disclosure and transparency.

        This is a nonrecourse mortgage that must be repaid. Nonrecourse has nothing to do with required repayment other than to limit the amount required. It is not a benefit for any senior who is not losing their home at payoff. I hardly call it a “benefit;” it is a protection for a protected and deserving class of individuals.

        The HECM Social Security benefit delay strategy is gambling with the financial life of a senior. If they must move before the payback period ends, their cash reserves are not fully restored and their cash from the sale of the home in many cases will be insufficient to buy a home of equal value.

        You show how little you understand this product when you say: “So we end up in a circular argument where we have to come back to why we have reverse mortgage: to retain home ownership (possibly through leveraging income and paying off consumer debt).”

        I have no idea how income is being leveraged. Can you please explain “leveraging income” in the context of a reverse mortgage? I have no idea what the purpose of other reverse mortgages are but Congress stated what its purpose was in creating insurance for a special cut out of reverse mortgages. It is to create liquidity not leveraged income. Your explanations are why this loan is so confusing, not complex. I doubt if anyone understands what you write other than you.

        Right now, the US Open is going on in NYC. Many more tennis plays who are in that tournament feel they deserve to be there. They will tell you how various hurdles have prevented them even they are doing their best. Well their best is NOT good enough. Just like your first comment was no doubt done at your best but it was NOT good enough.

        You could be right with your wild accusations but you have no idea if I am or am not what you say. You have no idea who I know and what their asset base and income is. In some cases, even I do not know their asset base or income but you are so opinionated and biased that you see through me and know. Like you, I have little respect for your first comment. All I can tell about you is to be careful what you say and claim because your first comment shows that too many times that is most likely not the case.

  • JusttheFactsMa’am,

    You write: “But publishing this story just adds fuel to the overall ‘reverse mortgage is a bad thing’ fire.”

    The CFPB report, not study, is an attack on a highly risk based deferred benefit strategy that most likely when considering the age of the target has no place being recommended except by an adviser in an overall retirement plan. Reverse mortgage originators are not qualified to make such recommendations since we are not fiduciaries and are biased as to the outcome.

    If we make this report a story of its being an attack on the product then we will ensure that its result ends up being more fuel to the reverse mortgage being a bad thing fire.

    We have a choice to either accept the report or refute it. Nothing you presented refuted it. So all I can see you are doing is not just adding fuel but fanning its flames. If there is to be a successful refutation it will have to come from those who are outside of the industry who are recognized authorities in the field of finance. Your 400 closings mean nothing in this fight.

    Quite frankly, this is one strategy that belongs in the thrash and only to be resuscitated into individual retirement plans by real retirement planning specialists.

  • The CFPB has long been attempting to impose regulations and controls on the reverse mortgage industry.

    Richard Cordray has had a lack of understanding of the product just like his panel has from their inception.

    Don’t get me wrong, I am not saying that everything stated in this report is wrong, on the contrary.

    I will say that many seniors have been mislead to the true facts of the HECM, perpetrated by our own!

    However, to say “Warning on using reverse mortgages to delay social security”, to me is harsh to say the least.

    The reverse mortgage is an added benefit to enhance ones overall retirement strategy and improve the quality of senior homeowners lives!

    To even think the HECM is sold as a tool to delay the taking of social security is a ridicules assumption. The timing on when to take social security is based on many factors in our seniors lives!

    The CFPB is anything other than a true consumer protection agency. It has been a committee evolved out of the financial regulatory reform bill (Dodd-Frank) to take control of our entire financial industry. The reverse mortgage industry is picked on many times because the product is so consumer oriented to one of the most important segments of our society, our seniors!

    This does not necessarily mean the CFPB is so concerned about our senior citizens. Instead the CFPB uses the senior segment of the population to show the public how they supposedly can justify their name!

    The HECM is a fine tool for our seniors to plan and strategies for their retirement, if used properly!

    The HECM has been a thorn in the side for the CFPB mainly because of their lack of true understanding of it.

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

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