Brookings Researchers Call for ‘Substantial’ Changes to Reverse Mortgages

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.”

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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 

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  • But the question is how much do Mr. Baily and Mr. Harris know about HECMs? The answer is not all that much. For example, they say: “Reverse mortgages are products available that allow families to
    turn their housing wealth into cash, either in the form of an annuity or lump-sum payments.”

    The report goes on to say: “Under the annuity payout structure, a retired couple will receive a payment as long as they live, but the issuer of the mortgage will then own the house when they die or move.” The authors do not seem to know the difference between a mortgage and a sale of the home resulting in a life tenancy for the homeowners with the bank as the remainder man along with a option for the bank to buy the home if they move.

    With no discussion about the increased risk to the MMIF from the introduction of a new low MIP product, it does not seem like the authors are in touch with the problems the program is facing. They also did not define the characteristics of this new product although they described the borrower they are targeting.

    If HECMs were not a mortgage accounted for in the MMIF but a social program their ideas would be great as would be the ideas that so many others have suggested.

  • IMO charging 2% UFMIP to someone who responsibly takes a standby reverse mortgage is foolish, turning away the very customer we needed leading to T&I defaults!

    The savvy borrower who desires to stay in their home and seeks a standby RMLOC is *10x more likely to pay into ongoing MIP and 10x less likely to cause T&I issues. (*reference common sense) and the high quality borrower that FHA needs to support a balanced MIP fund isn’t going to pay the government upwards of $13,593.00 (and $20K+ total with orig./ closing costs) to substidize higher risk borrowers for setting up a HECM LOC, and they’re not taking a lump sum proprietary product as an alternative accruing unwanted interest to avoid the UPMIP.

    The HECM saver seemed like the right product for today’s borrower and it didn’t have a chance to get to market before being pulled off the shelf. Why? How can you measure the effectiveness of a product with no time to gather result driven data? Is there anyone gathering data on all of the HECM saver loans originated with present claims? I strongly feel without a low UFMIP option the FHA is unintentionally attracting the opposite customer, a heavier % of needs based borrowers who add additional risk to the fund with higher UPB’s/ mandatory obligations, greater chances of future T&I defaults, lower property appreciation rates etc.

    I sure hope our FHA leadership gets hold of this study and take a look into making positive changes that can reenergize our industry and better serve our customer!

    • Cliff,

      There is so little predicted loss from T & I defaults after 4/25/2015 why even bring it up.

      No borrower can pay ongoing MIP. It is the cost of the lender. Borrowers are merely reimbursing the lender/servicer which paid the ongoing MIP. On top of that this is a loan that is collateral based not borrower payment ability based loan.

      Even though, the US Treasury collects HECM ongoing MIP from the servicer, for accounting purposes it is treated as if the MMI Fund collected the MIP.

      The HECM Saver had a lot of chance. The problem is so many originators stated over and over they did not know when to use it. According to these sources, most HECM borrowers wanted a higher principal limit not lower upfront MIP.

      I am afraid we stand at opposite ends of what you recommend.

  • Perhaps, the timing of this article could have been better planned. Reconstruction of HECM again now just postpones a successful acceptance among jaded prospects from before. A private letter to Ben Carson might have been wiser, don’t you think?

    • Hey Warren,

      I have little problem with the column above but have a lot of problem with the report since it shows how little the authors know about HECMs and also with how they provided no positive recommendations on how to pragmatically change the HECM so that it can meet the suggestions, the authors made.

  • A lot of great comments from my colleagues and I agree with most of what everyone has stated!

    As wstrycker puts it, the timing of this article could have and should have been better planned!

    Martin Neil Baily of the Brookings Institution and Benjamin H. Harris of the Kellogg School of Management at Northwestern University show their lack of knowledge about the HECM product.

    Many of their invalid accusations don’t help the image of the HECM, especially to those reading their releases.

    I don’t disagree with them that changes must be made to better our product, especially after the last changes we all have experienced. However, we need to approach it differently then these people did!

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

    • John,

      Change to better something is always a great idea. But change that is done without sufficient planning, research, forecasting, and testing is our history since October 4, 2010. The folly became that the assumptions were right but the fact pattern was not cooperating. This way of thinking reminds of those in the industry who tells to forget the numbers of the past because we are living in the present and going into the future where everything will be different.

      Until Secretary Carson put his foot done last year, those who provided the Annual Report to Congress on the Financial Status of the MMIF after fiscal 2009 spent time and effort covering up the losses that the HECM was generating annually.

      So until someone can show why change is needed, NO change should be proposed. The increased forecasted losses from last fiscal year on each cohort of fiscal year endorsements and the loss from the new cohort of endorsements for the fiscal year 2017 was reason enough to support Mortgage Letter 2017-12,

      So I find the nonspecific changes suggested by you and the authors of the report are not just questionable but they are dangerous.

      • George,

        I am not agreeing with what the report says, read my comment again. What I said toward the end was:

        “I don’t disagree with them that changes must be made to better our product, especially after the last changes we all have experienced.

        However, we need to approach it differently then these people did!”

        What i am really saying is, that we need change, no one will disagree with me on that! Also what I am saying is that, I do NOT agree with is their approach to it at all what so ever!

        What you are asking of me, I think? Is, what changes are needed. OK my friend, ask away and I will give you my opinion as I see it!

        Thanks George,

        John Smaldone

      • John,

        You say you are for change but what change? I cannot read your mind and to go off on countless changes is not productive.

        Just state what changes you support.

  • Mr. Veale & I agree on this one. This “think tank” needs to think a little harder about the product they are opining on.
    That being said, an option for lower MIP for borrowers with lower risk loans is absolutely a necessity…
    With the current cost of our beloved reverse mortgage it has reverted back to a true “needs based” product….
    Now, that being said, there is nothing wrong with that! To a certain degree all products, in almost all wakes of life, are needs based.
    But if a client is going to be charged $10,000 in MIP + state specific closing costs, it better be a damn big need!!!!

    • Mr. Banner,

      Yesterday, I looked at the HUD HECM Snapshot Report for April 2018 (HUD’s latest post). I found a HECM endorsed for that month that had a MCA (Maximum Claim Amount) of $35,000 and an initial PL (Principal Limit) of just $18,095. There were 159 endorsements where the MCA was $100,000 or less. 957 endorsements had MCAs of $200,000 or less. Again the endorsements were exclusively those made in April 2018 which only had 3,345 endorsements.

      It is important that WE understand what is going on as well as the authors of the report. Perhaps the costs on the home appraised at (or purchased at) $35,000 had as much as (or more than) $3,000 in total upfront costs. That means at $3,000 in upfront costs, total proceeds from the HECM were just $15,095. That means that 16.6% of the total proceeds went to pay upfront costs. If reasonably accurate, that is ugly.

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