In a report that lays out the dire retirement future facing many Americans, a pair of researchers for a prominent think tank argue that the federal reverse mortgage program requires a significant overhaul in order to serve seniors into the future.
Martin Neil Baily of the Brookings Institution and Benjamin H. Harris of the Kellogg School of Management at Northwestern University call on the government to update the Home Equity Conversion Mortgage for the benefit of retirees.
“Under the current structure, even retirees who borrow only a small share of their housing equity are required to pay exceptionally high fees to account for the potential of default,” Baily and Harris write in “The Retirement Revolution: Regulatory Reform to Enable Behavioral Change,” a new report from the non-profit Brookings Institution. “This program should be revised, as was tried under the HECM ‘Saver’ program, so that low-risk borrowers with low relative borrowing do not have to pay higher fees to subsidize higher-risk borrowers.”
Like their peers at Boston College’s Center for Retirement Research, Baily and Harris note the steady erosion of defined-benefit pension plans among American workers, which puts the onus of retirement savings on the individual. That’s not always a good thing, they argue: Fees for investment managers and products aren’t necessarily transparent, they note, and the rise of 401(k)s and other equity-driven retirement options exposes workers to risks — such as a major economic downturn that occurs before or during retirement.
“There are many advantages to having a financial advisor who can help families make the right saving and investment decisions, including navigating tax rules,” Baily and Harris note. “Unfortunately, finding good advice at an affordable price can prove difficult.”
That’s where reverse mortgages could come in as a solution, but the Brookings report points out some potential problems.
“Decades ago, these products earned a reputation for being fraudulent and carrying high fees,” the writers noted. “There have also been stories of heartbreak because elderly couples failed to understand the obligations they faced under the terms of their reverse mortgage and ended up losing their home and being evicted.”
Still, those issues are “rare” and solvable, Baily and Harris assert, before echoing a turn of phrase that had previously served as the basis for an American Advisors Group commercial featuring current pitchman Tom Selleck.
“Perhaps as a result, mainstream financial services companies have been reluctant to enter this market. These problems need to be solved so that reverse mortgages can become one of the legs supporting the retirement stool,” they write.
This isn’t the first time that the Washington, D.C.-based think tank has weighed in on the potential of reverse mortgages and retirement: Back in 2014, Harris said seniors should consider the HECM as an option — despite “reports of improper lending behavior and misunderstanding among borrowers.”
The president of Brookings’ Center for Responsible Lending also called for greater funding for necessary upgrades at the Federal Housing Administration last year.
Written by Alex Spanko