Reverse Mortgage Researcher Pfau Weighs in on New HUD Regulations

Academic inquiries from researchers such as Barry and Stephen Sacks, Stephanie Moulton, and Wade Pfau have increasingly been used to promote reverse mortgages as retirement planning tools, and have contributed to shifting perceptions of the product among the general public.

But as the industry prepares for lower principal limit factors and increased insurance premiums, a lot of that research is suddenly outdated — and the exact effects on the Home Equity Conversion Mortgage on retirement strategies once the new rules take effect on October 2 is still unclear.

Pfau — a professor at the American College of Financial Services in Bryn Mawr, Pa. — weighed in on the coming shifts on a webinar hosted by Reverse Mortgage Funding last week, offering speculation but cautioning against making definitive statements about the future uses of a HECM.


The event was designed to educate financial planners about the product, but Pfau used the time to explore some of the post-October 2 possibilities, laying out a list of potential HECM strategies ordered by the speed at which the funds are used: For instance, the HECM for Purchase sat on top along with using a reverse mortgage to pay off an existing forward mortgage or to fund aging-in-place renovations, while opening a HECM line of credit to hedge against retirement spending “shocks” was listed at the bottom.

Because the new lending rules will result in slower growth for open-ended HECM lines of credit, Pfau said, consumers may find the more immediate uses for reverse mortgage proceeds more attractive, and the longer-term plays less so.

“It’s not going to be as attractive,” Pfau said of the line of credit. “I don’t know how much less attractive at this point.”

For instance, RMF advisor channel leader Tom Dickson presented data showing that under the new rules, a 62-year-old borrower with a home worth $636,150 would eventually reap $600,000 less in credit-line growth by the time she turned 92.

“It really benefits the consumer at the expense of the lender and the mortgage insurance fund,” Pfau said of the credit-line strategy. “I don’t think it’s been a very popular strategy, but I think the government’s just trying to close that door before it opens too widely and too many people start trying to do that.”

But Pfau also emphasized that the growing line of credit remains a “very powerful retirement income tool” despite the changes.

“That growth’s still going to happen, just a little less in terms of the percentage,” Pfau said.

Written by Alex Spanko

Join the Conversation (10)

see all

This is a professional community. Please use discretion when posting a comment.

  • While some of us might not rank things in the same order as Wade, things will change and so will the favor of prospects about the available strategies. The changes should result in something that looks like what the program looked like on 1/1/2008 when the lending limit in some parts of the US was $362,790. Today there are few active HECMs with MCAs above $500,000. There are many reasons why the appeal of HECMs and their appeal will fade in 2018 but none of them have been adequately addressed by the industry.

    Who expects that the HECM will be of the same interest to the moderately wealthy that HECMs MIGHT have been as little as two months ago? It is the exactly the same product but its solutions will be dramatically reduced in just a few weeks.

    Who knows from what data Tom gets his $600,000 lower line of credit? He probably knows very well but that knowledge is not transferred in this article. It just seems we are left in the dark to either accept it or not. He makes it difficult to perceive what he is excepting to see as the prevalent margin by the end of October 2017. He also does not tell us what the differences are in the upfront costs that he expects borrowers to pay between his two scenarios. Is it just upfront MIP?

    The lack of information in Tom’s illustration once again demonstrates just how translucent this industry is and intends on remaining. There is just no concern about anyone understanding what it is Tom is promoting except the obvious. If the paragraph were removed, the article would essentially be the same except we would not know that Tom was involved in the webinar. Would the paragraph be less credible, If just Tom’s name were removed from the paragraph in question? Probably just the opposite since the conclusion would be made by most readers that Wade, a far more recognized authority, made the $600,000 determination.

    Will H4Ps demand do better after 10/2/2017 than it does now? I, for one, find that very hard to believe. The article contains the same propaganda about H4Ps that we have heard for the last 9 years. It is a sales job that tests and reduces the integrity and credibility of those who repeat it.

  • At the 18% rate it appears that the new LOC growth should surpass today’s LOC growth if the timeframe before cashing out the LOC is greater than about 14-15 years.

  • We can all try and guess what will happen after 10.02.17 but any way you slice the pie, it will be smaller! We don’t have a choice other than to adjust, make what we have work.

    Yes, some of the market will be eliminated but new markets are out there for us to tap into. We need to look for those seniors with a great deal of equity in their homes. The line of credit will still be and always should be a great retirement planning tool, especially used as a hedge to other investments.

    The H4P still has a lot of potential, sure we have problems with the product the way it is structured but hopefully that will be worked out down the road. Even though there will be lower amounts to work with after 10.02, the H4P is a valuable program for seniors who are downsizing.

    The point is that the H4P is a market we have not focused on, I feel we need to, just like we need to focus on other markets.

    Because of the new ruling does not mean we can’t focus on the financial planners and other fiduciaries out there. They are a great market source we need to focus on!

    The world is not falling apart, it is just changing so we change with it, those that can will be fine in the end!

    John A. Smaldone

  • Hey John Smaldone,

    We can’t keep things the way they are. They will change on 10/2/2017, like it or not.

    We have to keep advertising, marketing, farming and getting more seniors interested in our product so we need to start adapting. Right now experienced speculation is the best we have.

    Unless you are an over-the-hill status quo kind of guy, there is nothing in the thread that seems to be pessimistic even though aversion to change is expressed and those who are trying to provoke thought on what the change will mean.

    I appreciate your view that the well to do will seek out the product due to its alleged ability to provide a practical means to hedge losses on portfolio type assets.

    My view of these changes is irrelevant but I enjoy reading the views of others including yours. BUT I will agree with your conclusion that the HECM world will EASILY survive these changes. I am one of those who believe that HUD had good reason to make the changes before Congress tried to “help out.”

    • The Positive Realist,

      I can assure you that I am not “An over-the-hill status quo kind of guy”!

      I also know very well that we can’t keep things the way they were, I would like to think that is what I have been saying all along. However, I would also like to think I have been conveying my message in a positive way!

      I am only trying to stress what you have stated, “We can’t keep things the same as they were”.

      I only point out that we as an industry must do what you are stating, we need to find new markets. I am not saying to limit ones scope to only the affluent, on the contrary!

      On the other-hand, we have to be realists. We know some will have to come to the closing table with funds to meet a shortfall after 10.02.17. Prior to to 10.02, many of these same seniors would not have!

      I don’t disagree with anything you are saying, I think you may have misunderstood the intent of my comment.

      By the way, I am like you, I enjoy reading the other views, I don’t agree with them all and there are some I do but I do enjoy them.

      Thanks Positive Realist,

      John A. Smaldone

      • Hey John,

        Because of its current abuse and your support of its promotion, I question your support of the expansion of H4P as it is currently constructed. It is a product that needs reform. One of the primary principles in the psychology of money is so abused by our industry in originating this product, we will eventually destroy it as an available product.

        There is no difference between seniors getting a fixed rate product to get as much as possible so that they will be able to retain their cash reserves or increase them through originating a traditional HECM, a refi HECM, or a H4P. As to tradition and refi HECMs, HUD rightfully killed that horrible strategy that resulted in so much loss to seniors since they did not effectively invest their excess cash at rates that covered the accruing costs on the cash that came from the HECM. HUD did not want to see seniors investing into risky products that could cover those costs because of that risk.

        What we see with H4P today is exactly the same as what we saw in traditional and refi HECM originations before 9/30/2013 (the addition of the first year disbursements limitation). Some claim that the borrowers’ financial advisers tell these borrowers to avail themselves of the full draw strategy stated above as a fixed rate product. The problem is most of those financial advisers are nothing more than asset managers who look for ways for their senior clients to invest more cash with them. Seniors are generally decumulating portfolio assets and these asset managers see a loss in revenues in a senior’s decumulation phase. Unfortunately it is well known that most of these money managers do not provide earnings to their clients that exceed the combined rate on accruing costs on the balance due on the HECM.

        Perhaps the need is to limit the mandatory obligation on proceeds used to purchase the home to 40% of the principal limit on the HECM. Perhaps it is time to appeal to HUD to pursue such a change.

        What do you think should be done, if anything?

  • As to regulations, Dr. Pfau says nothing. What he is actually opining on is Mortgagee Letter 2017-12. Under RMSA, I have no idea what takes precedence, the new regs or an earlier Mortgagee Letter. This is but one of the many problems with understanding the position of authority in relation to either law or regs. It would seem that a RSMA memo or Mortgagee Letter posted later than the issuance of a reg or the date take precedence over a law or reg with effective dates before the posted date of the RMSA Mortgagee Letter.

    Let us hope HUD quickly provides us with clarification on this issue.

string(110) ""

Share your opinion

[wpli_login_link redirect=""]