Mortgage Professor: HUD Remains ‘Hostile’ Toward Reverse Mortgage/Annuity Combo

Since annuities provide the only way in which retirees can share mortality risk with others in the same age bracket, they should be in nearly every senior’s retirement plan. The fact that they are not speaks to the chaos of the private retirement system in the United States, and the Department of Housing and Urban Development (HUD)’s hostility toward the combination of an annuity with a reverse mortgage contributes to this chaos.

This is the perspective shared by Jack Guttentag, aka “the Mortgage Professor,” in a new column at Forbes.

“Retirees who could profit from an annuity but don’t […] suffer lower spendable funds over their life spans,” Guttentag writes. “The loss is particularly large among homeowners with limited or no financial assets. These are the ‘cash-poor-house-rich’ retirees, who comprise a large proportion of all retirees.”

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For a retiree in their early 60s with no assets but a house worth $700,000, there are two options available under the Home Equity Conversion Mortgage (HECM) program. The first is more commonly used, and that is a tenure payment which provides a regular monthly payment for as long as the retiree lives in the home, Guttentag writes.

“The alternative, which is substantially better but little used, is to draw a credit line, part of which is used to purchase a deferred annuity while the remainder is used to provide spendable funds during the deferment period,” he says.

This is complicated by “highly imperfect” market structures for both HECMs and annuities, since prices on the same transaction can vary wildly. Additionally, HUD tends to look down on the combination of an annuity with a HECM line of credit.

“HUD is hostile to the practice of combining reverse mortgages with annuities,” he says.

HUD is unable to tell a borrower what they can or cannot do with a HECM loan’s proceeds, but instructs counselors who determine a client’s readiness for the loan’s responsibilities to determine if the client is considering using the loan proceeds to buy an annuity; and to inform the client that there are ways to obtain an annuity without HECM proceeds, Guttentag says.

Counselors must also discuss the costs and implications of using the proceeds to buy an annuity; and finally to explain that, in some cases, fixed monthly advances from an annuity may be smaller than fixed monthly advances of HECM proceeds, he adds.

“The last point is flat-out wrong,” Guttentag says. “A corrected statement, based on the evidence provided earlier, would be that fixed monthly annuity advances funded by HECM credit lines will almost always be larger than fixed monthly loan advances from a stand-alone reverse mortgage. The reason is that the first option involves mortality risk-sharing while the second does not.”

Read the column at Forbes.

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  • I fully agree with Guttentag, and always suggest to my customers who are considering a tenure payment that they compare it with an annuity AND take into consideration the portability of the latter.

    I would, however, like to see “the numbers” behind his payment comparison matrix and chart. I would find it surprising that an annuity payment with a COLA rider as illustrated in the chart would exceed the tenure payment on an identical amount, even after 5 years. I may be pleasantly surprised!

    • I also agree (for the most part) with the comments below. My suggestion to “compare” applies only to the monthly payment; a decision to act would follow a thorough discussion of the excellent points made below.

    • Completely agree Jim.

      I recall the first time I met with someone who thought that an annuity funded by reverse mortgage proceeds would be a good idea. I said to that person “show me that it’s better than the reverse mortgage as a stand alone product, and I’ll recommend it to all my customers”. Still waiting on that demonstration. I will say, what the good Professor says regarding portability of an annuity does make it something worth further investigation and study.

  • This business of annuities funded with a reverse mortgage always seemed like a scam to generate commissions and fees.

    HECM interest, MI, and fees are negatively compounding monthly. How much does the annuity growth offset this cost? My guess is it doesn’t, and if at all, probably not enough to justify the additional complexity.

    While you’re enjoying the “security” of the annuity payments, you’re equity strip is growing exponentially.

    Security? Do annuities have any kind of guarantee like FDIC deposit insurance? Why move money that secured by HUD, and which you’re already paying insurance on, into an unsecured vehicle? How much will you collect if the issuer files BK?

    This is what I advise: Use the HECM line of credit and only draw the minimum when needed. If you don’t need money this month, don’t automatically take a draw. This can save hundreds of thousands of dollars over the life of the loan.

  • While everyone wants more money, the real question is what does that money cost? Does it really make sense to borrow money at a compounding interest rate in order to purchase a taxable asset that is guaranteed to produces income at a lower rate than what it cost for borrowing the money?
    Deferred annuities are complex financial instruments that lock up money for a period of years, that carry severe surrender penalties, and are not 100% guarantee if the insurer goes BK. The math is simple: Interest earned on a deferred annuity is insignificant compared to the compounding interest on the money extracted through the RM line of credit and the additional accruing debt created by the loan origination fees and costs.

    I ran this article by a life agent who has been selling annuities for over twenty-five years and here’s his observation: “There is no information on any of the products he’s using (just that they’re ‘the best’), or calculation of what this combo does to net worth (you’re using the asset to essentially purchase monthly income, as far as I can tell). There’s no indication of the products used, no analysis of the actual cost of these products, including sales charges, surrender fees, etc, no clear idea of what the actual types of products used are, incorrect annuity terminology. What could possibly go wrong?”
    While there are very good reasons for seniors to get reverse mortgage, they are very expensive loans and shouldn’t be pushed on those who don’t need them.
    There is also the ethical issue. Jack Guttentag states, “Many if not all annuity providers have a policy of rejecting annuities that would be financed with a reverse mortgage. The reason seems to be a concern that such transactions expose them to litigation from disgruntled heirs who claim they were cheated out of the house they expected to inherit.” Really? Exactly who are these “disgruntled ones”? You can’t justify a questionable transaction by shifting the spotlight to greedy grandchildren. Mr. Guttentag apparently shrugs off any concern for those who will be displaced when the last borrower moves into a nursing home or dies. The cold facts are that unless the loan can be paid off everyone living in that home will be evicted, absolute. If, on the other hand, the loan can be paid off, then there’s the obvious question of why did the senior get an institutional loan when they could have gotten one from their would-be heir? That arrangement would be cheaper for the heirs in the long-run (a few hundred a month and in return get an unencumbered home after their loved one dies). Anyway, it more likely that those living with the borrower would be a low wealth relative or an aged or disabled individual who, upon eviction, will end up … God knows where. Maybe Mr. Gottentag, the mortgage professor, has the answer to that. That would make an interesting study.

  • Mr. Prescott Cole, can you please explain yourself when you say “While there are very good reasons for seniors to get reverse mortgage, they are very expensive loans and shouldn’t be pushed on those who don’t need them.”

    I would ask, compared to what? I believe our industry would agree that they shouldn’t be “pushed on those who don’t need them.” I would ask, who are you to judge who “needs” them? Who is telling you that those of us in this industry “push” these loans on seniors? It’s been my experience that the overwhelming majority of originators have seniors’ best interests at heart when talking to them about HECM’s, and do NOT in any way “PUSH” them onto anyone. You have leveled an accusatation that has no basis in fact. You should apologize to the thousands of HECM industry employees what do their level best to help seniors in retirement planning. I await your post in providing such an apology.

    Those of us who have been in this industry for many years get tired of this tripe about a HECM being “very expensive”. Your characterization is wrong. It’s always proven to be wrong when someone says this, and then provides absolutely NO evidence of the claim. You provided NO evidence or explanation on why you would make such a statement. In your business, it could be called libel.

    We all await your evidence of your specious indictment of a program that over 1 million Americans have judged to be worth their while….

    • Brien,

      You state: “… a program that over 1 million Americans have judged to be worth their while….” ?

      Where is your evidence? While it is very true that over 1 million Americans have obtained this debt, there is no evidence indicating that all but a few of these borrowers judged HECMs to be worthwhile following termination.
      There are no studies of borrowers after termination as to what their feelings actually are nor are there any studies of those who inherited the related collateral to determine their reactions following termination. So how is this industry so sure that borrowers are so happy about their decision? There are a number who are not, including some who have testified before Congressional hearings to that effect. There are more than a few articles say the same.
      There is a clear need to prepare prospects better to the realities of termination and how unlikely it will be for them or their heirs to retain ownership in their home following termination. The canned but truthful answer that title will pass to heirs is not what prospects are really questioning.

      The “compared to what” argument about costs has never been “proven” by the industry. It comes with a lot of bluster and intimidation. Yet this does not mean that there are no such cases. Compare the upfront costs of a proprietary reverse mortgage to a HECM. Yet in most cases, the overall proportionate cost is higher with a proprietary reverse mortgage if held beyond a minimum period of time. Of course this assumes that there are no draws or paydowns before termination and both loans begin with about the same significant unpaid principal balance.

      The fact is most of the time (depending on the servicer), HECMs do exactly what they are supposed to do. On the other hand, too many loan officers claim that HECMs do what they do not do. For example, nonrecourse does not mean that a borrower can never owe more than what the home is worth. Ask borrowers whose loans were underwater and tried to hang onto their collateral. Unlike heirs, borrowers must pay the entire unpaid principal balance as of termination to retain title to the collateral following HECM termination. Then there are the claims that FHA insurance makes HECMs nonrecourse but that is nonsense. Just because borrowers reimburse lenders for their costs does not mean that lender”s FHA insurance provides nonrecourse for a HECM because it does not . It is federal law and the lender’s covenants that are found in the HECM loan documents that provide nonrecourse for HECMs as is the case for proprietary reverse mortgages.

      I agree with John Smaldone that few HECM detractors discuss the benefits that HECM borrowers get from obtaining a HECM. For example, being relieved of a forward mortgage with monthly payments of interest and principal can be a major source of relief to those who are having trouble with monthly cash flow. Or then there are those who need care not covered by Medicare or Medicaid that a reverse mortgage can provide. Reverse mortgage proceeds can be used to defer capital gain recognition for estate income tax planning purposes. A HECM can be misused but on an anecdotal baiss that seems to be a low risk for most borrowers.

      • Mr. Veale,

        My evidence that over 1 million have judged the reverse mortgage to be worth their while is as plain as the nose on my face. Had they not deemed it so, they would not have closed on a reverse mortgage to begin with.

        You talk about no study having been done once these loans have terminated and I’m quite sure you’re correct. That would be pretty difficult considering many of the borrowers had termination occur when they passed away. But as I’m sure you know, a study that has been done regarding satisfaction with their HECM of borrowers by Dr. Stephanie Moulton of Ohio State reported very high levels of satisfaction with borrowers decision. https://www.jstor.org/stable/26328299?seq=1

        I’ve been engaged in reverse mortgage lending for over 22 years now and had the great fortune of being mentored by industry pioneers like Jeff Taylor, Roger Reynolds and others. During that time, I’ve engaged hundreds of other loan officers and countless borrowers. I have originated these loans and still do to this day. I’ve hired, trained, managed and mentored over 100 loan officers across this nation during this time. I haven’t gone onto LinkedIn to review your resume Mr. Veale but I would ask, how many reverse mortgages/HECM’s have you originated in your career? How many kitchen tables have you sat in discussing the benefits of a reverse mortgage for a family, oftentimes including their children? Sure, there have been bad players out there, some who may have pushed some loans on borrowers, but those are the exception by far if the quality of the loan officers I’ve met at NRMLA gatherings, employment interviews, and social event are any indication of the type of people in my industry.

        I’m proud to be a reverse mortgage professional and will continue to be for the remainder of whatever my career may span. Thank you John Smaldone for the kind words.

        The opinions I’ve expressed here and in my earlier post are my own and have not been approved or reviewed by my employer. God bless.

  • I agree with Brian Brandenburg, I am one of those who have been in this industry for many years and yes, a reverse mortgage does carry costs!

    However, what about the benefits connected with a reverse mortgagor for the senior. Ever think if the need is there and it benefits the senior in a way that the benefit far out weighs the the cost. What then Prescott?

    Many of us us in the reverse mortgage space have the seniors best interest at heart and would never push our seniors into anything. We don’t push, we guide, give good advice and if and when it fits the need properly, then and only then we will put them into a reverse mortgage. And you know what, 99% of the time, those that we do right by, stay in touch with us and become great referral sources!

    Great come back comment Brian!!!

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

    • John,

      There are good points in your comment, one I mentioned in my reply above. There is one point that needs some correction as presented below.

      During fiscal years 2011 through mid fiscal 2013, pushing did go on. Far too many originators were stating that all they were allowed to sell were fixed rate HECM Standards due to the high unpaid balance they produced. Many originators were questioning why should they even bother presenting HECM Savers or adjustable rate HECM Standards. Some were deliberately ignoring these HECMs because they did NOT FEEL seniors wanted them and after all wasn’t it in everyone’s best interest to originate fixed rate HECM Standards since they normally provided the highest principal limit to borrowers? One reverse mortgage originator accused another reverse mortgage originator of steering seniors because the second originator believed all products should be presented to prospects.

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