The regulatory separation of Home Equity Conversion Mortgages (HECMs) and annuities is a potential negative for American seniors looking to secure their retirement because the two products types are complementary. This is according to Dr. Jack Guttentag, aka the “Mortgage Professsor,” in a newly-published column at Forbes.
In the very opening of the column, Guttentag asks the question: why do regulations forbid integration of key retirement planning tools?
“The answer is that the loss from absence of complementarity is not generally recognized, the population segment that is victimized is not identified, and the regulatory structure responsible for the separation of functions is oblivious to the harm separation of functions has caused,” Guttentag says. “The bottom line is what HUD, the regulator responsible, ought to do in penance.”
Guttentag posits that vulnerable seniors are simply overlooked in the equation of annuity and reverse mortgage regulation, primarily those who have the majority of their wealth tied up in their homes.
“[R]etirees aged 65-74 had a net worth of only $266,000 in 2019, of which $240,000 was in their homes,” Guttentag says based on data from the Federal Reserve Survey of Consumer Finances.
The level of wealth inequality in the U.S. has also been on the rise, he says, which exacerbates the issue for vulnerable seniors.
“Between the third quarter of 1989 – the earliest date for which wealth data are available from the Survey of Consumer Finances — and the second quarter of 2021, the wealth of the lower half of wealth holders rose by 304% whereas the wealth of the top 1% rose by 800%,” he says. “In addition, the share of wealth comprising the residences of the lowest wealth group has increased over time, whereas the concentration for higher-wealth consumers has declined.”
Regulations mandating the separations of annuities and reverse mortgages emerged in the early days of the Home Equity Conversion Mortgage (HECM) program, Guttentag says, during a period when the products would be paired under “extortionate terms,” he explains.
“In response, HUD instructed the counselors who potential borrowers must consult before submitting a loan application, to warn borrowers to beware of annuities,” Guttentag says. “HUD also prohibited HECM lenders from having relationships with other financial institutions. On the annuity side, because some of the early combination deals led to lawsuits against insurers by disgruntled heirs of HECM borrowers, the industry adopted the rule that annuities could not be financed with proceeds of a reverse mortgage.”
The only such combinations permitted now are those in which “retirees conceal the source of the funds used to pay for the annuity,” Guttentag says. “This private regulation would disappear if HUD legitimized HECM/annuity combinations.”
Guttentag goes on to offer proposals for how such a goal could be accomplished via regulation, while still permitting seniors to make a reverse mortgage/annuity combination while enjoying the protection of regulations.
Read the column at Forbes.