Backlash to CFPB’s Reverse Mortgage Report Continues

A prominent reverse mortgage researcher joined the criticism over the Consumer Financial Protection Bureau’s recent report on the products, calling the bureau “wrong.”

Wade Pfau, professor of retirement income at the American College of Financial Services in Bryn Mawr, Pa., wrote a lengthy post for Advisors Perspectives that disputes some of the CFPB’s findings. Back in August, the bureau issued a report warning against the use of Home Equity Conversion Mortgages to delay receiving Social Security payments, presenting data that showed costs outweighing the gains.

But Pfau, along with other retirement researchers, claims the bureau’s analysis was incomplete. For instance, he disputes the CFPB’s methodology of basing retirement projections on average life expectancy.


“Do not base your decisions about what happens [on] life expectancy, but rather what happens if we live well beyond life expectancy,” Pfau wrote. “Delaying Social Security is a form of insurance that supports the increasing costs associated with living a long life.”

He also posits that the CFPB should have taken into account individual borrowers’ retirement portfolios and liabilities, arguing that smart retirement planning involves figuring out which expenses need to be covered and how to cover them.

“We have to test this to see which strategy can best preserve net worth after retirement expenses are met, so that more liquidity is available later in retirement to fund a move or other expensive shock,” Pfau wrote. “The CFPB report ignores both the spending goal and the investment portfolio, so it does not provide a meaningful conclusion about what a retiree at 62 should do.”

Pfau then lays out several additional analyses using Monte Carlo simulations, which show scenarios in which using a HECM to delay Social Security payments and avoid large retirement-portfolio distributions could be beneficial to the borrower.

“Using a HECM to fund Social Security delay does not create greater risk for retirees experiencing spending shocks or needing to move later in retirement, because reduced distribution needs from the investment portfolio and the subsequent reduction in sequence risk offset the reverse-mortgage costs and preserve overall net worth,” Pfau concludes.

Read the full analysis at Advisor Perspectives.

Written by Alex Spanko

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  • The analysis provided by Dr. Pfau does what it claims in substantially calling the CFPB analysis into question but it falls short of providing sufficient evidence that the strategy should be generally employed.

    The easy part is to attack the analysis of the CFPB as being short of its stated purpose. On the other hand, the CFPB should be praised for calling into question a general use of HECMs in deferring Social Security benefits. The strategy can work but like so many other presentations where is there any presentation on its heightened risks?

    Dr. Pfau and I disagree that only a long-term view should be used in analyzing financial strategies. To properly evaluate risk and understand its magnitude, this strategy must include an unbiased analysis of short-term risks. For this discussion, we will assume that the Social Security beneficiary is single.

    The peak of risk and the apex its magnitude is the day before benefits are to start. If death occurs on that day, all benefits foregone since age 62 are lost to the estate. Where a HECM is involved one must include in the magnitude of the loss all HECM costs including accrued interest and ongoing MIP. Even if the beneficiary is receiving the increased benefits until the total of the increase in the benefits received (total benefits minus those that would have otherwise have been due if benefits had started at 62) exceed all foregone Social Security benefits and the costs of the HECM, the estate could incur loss. The period during which all of the foregone benefits and HECM costs are recovered is known as the payback period.

    Some want to talk about increased COLA benefits but those have been scarce in recent years. Then there is the increased taxability of Social Security benefits due to bunching them together and the computation determining how much of the benefits are taxable that offset them. On top of that is the possible increase in the effective income tax rate on the taxable income. COLA benefits generally will not be sufficient to cover the cost of higher income tax costs.

    Risk tolerance is a major part of retirement planning so not seeing risk analysis or a discussion of the payback period in the presentation was somewhat disconcerting.

    Social Security benefit planning should be a part of the retirement planning provided by an adviser with a legally mandated fiduciary duty to clients. Most of today’s financial advisers only have a general duty to their customers. Those with a higher standard of duty generally cost more but as the saying goes, you get what you pay for.

  • The ultimate issue here is that every household is different. I think that I tend to agree with James Veale that, for the vast majority of people, this is probably not a great idea, but there are those that can benefit from it. (James, please tell me if I am wrong.) I do not agree with the sweeping condemnation by the CFPB, but I do believe that a warning is reasonable.

    Too many people get caught up in the trend of the week when planning for retirement, without stopping to decide if it is correct for them. A family member heard about putting their house in a trust, and she just had to do that. For her, it was bad financial planning, and probably cost her children $40k or $50k in taxes that could have been avoided. However, she heard about it at a seminar and it had to be done. When I would not do it for her, because of the tax issues, she went somewhere else and paid, what I considered to be, and very large amount of money for something that she did not need. Sigh.

    Frank J. Kautz, II
    Staff Attorney

    Community Service Network, Inc.
    52 Broadway
    Stoneham, MA 02180
    (781) 438-1977
    (781) 438-6037 fax
    [email protected]

    • Frank,

      The strategy is excellent IF

      1) the facts and circumstances of the borrower are appropriate and at the same time

      2) its risks —

      A) have been competently and adequately explained and

      B) fall within the normal range for the risk tolerance of that borrower.

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