Retirement Researcher Questions CFPB’s Reverse Mortgage Warning

The Consumer Financial Protection Bureau took a major swing at an emerging use for the reverse mortgage last week, releasing a study that showed the costs might outweigh the benefits achieved by using the proceeds to delay Social Security payments. But one prominent retirement researcher disputed those findings with a Tuesday article in Forbes.

The CFPB’s analysis was “incredibly flawed, misleading, and harmful,” according to Jamie Hopkins, an associate professor of taxation at the American College of Financial Services in Bryn Mawr, Pa.

In Hopkins’ view, the report fails to account for the advantages that borrowers can gain through Social Security deferrals if they live longer than expected: While the CFPB calculated the benefit increases based on average lifespan, Hopkins argues that the real goal of waiting is to hedge against a longer-than-expected retirement.

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Hopkins also takes issue with the bureau’s analysis of Home Equity Conversion Mortgage costs, noting that most borrowers no longer have to pay servicing fees — the CFPB estimated a $35 per month charge — and that many receive credits from lenders and brokers to help mitigate closing costs, which did not play in to the bureau’s calculus.

Finally, Hopkins claims that due to the relatively small number of people who currently employ this particular reverse mortgage strategy, the Social Security delay method didn’t deserve such a strong, in-depth rebuttal from government regulators.

“If anything, the strategy is probably vastly underused, not over,” Hopkins wrote in his conclusion. “Instead of driving Americans away from a strategy that the CFPB showed was viable, they should be looking to provide guidance and insight into how Americans can effectively use home equity, Social Security, and reverse mortgages in positive way to improve retirement security.”

Read the full piece at Forbes.

Written by Alex Spanko

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  • Additionally, many using this strategy do not need to take the full amount of their available Social Security as RM monthly payments to themselves. For a number of people, many who are still working up to and beyond age 70, they may only need/wish to have a little extra – perhaps just a few hundred dollars per month.

  • Mr. MacDonald is right. Replacing a small percentage of foregone monthly Social Security benefits is very understandable since risk is limited.

    As to the presentation of Mr. Hopkins, the CFPB warning is very appropriate and relevant. The rather inept argument about lenders not charging servicing fees was more deflection than useful critique. I ran the same computation as the CFPB presented in its example and found that the CFPB results were immaterially impacted by the servicing fees.

    The argument by Mr. Hopkins about seniors outliving their life expectancy is rather short-sighted. It is not if the senior outlives life expectancy but rather how long that period is. After all we are looking for the appropriate reward for the risks undertaken. The best way to measure potential reward to the senior is to measure the payback period. If the payback period ends when the senior is 82 but expects to live to 83, the reward is far too small when compared to the risks of total loss plus HECM upfront costs, accrued ongoing MIP, and accrued interest. Then there is the risk of partial loss and loan costs throughout the payback period.

    The strategy should very rarely be recommended where at least 80% of the monthly foregone Social Security benefits must be replaced with HECM proceeds. While marital status and other facts and circumstances should come into play, it is hard to find much justification for using the strategy at a 90% or more replacement rate.

    For replacement percentages between those alluded to by Mr. MacDonald and 80%, the senior should not use the HECM replacement strategy without consultation with an educated, knowledgeable, experienced, qualified, and competent financial adviser with a legally binding fiduciary duty to his/her client. Despite recent statements to the contrary, the industry is reluctant to have their prospects seek the advise of such advisers since the industry generally views them as deal breakers.

    With this built in and widespread reluctance to send prospects to appropriate advisers, the CFPB warning is very justified. The NRMLA Ethics Committee should adopt the CFPB warning as written with no exceptions.

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