The rise of artificial intelligence (A.I.) and its utility in daily life is fast-evolving and disruptive, but also comes with complicated ethical questions for businesses.
The most visible A.I.-based tools — so-called “chatbots” that scour online information to intelligently construct responses to user input — are already seeing widespread use.
Both the reverse mortgage industry itself and government oversight bodies like the Consumer Financial Protection Bureau (CFPB) and the Federal Housing Administration (FHA) have created extensive educational and informational materials posted online that a chatbot, including OpenAI’s ChatGPT, can conceivably draw from. To that end, RMD asked ChatGPT a series of questions about the reverse mortgage product to gauge the accuracy and completeness of the answers.
Reverse mortgage overview
The first question asked of the chatbot was straightforward, asking “what is a reverse mortgage?”
ChatGPT’s answer was extensive and direct with generally accurate factual information, but did not include nuances that actual reverse mortgage educational materials tend to include about connecting with seniors in a consultative fashion.
“A reverse mortgage is a financial product primarily designed for older homeowners, typically aged 62 or older, that allows them to convert a portion of their home equity into tax-free cash without having to sell their home, give up ownership, or make monthly mortgage payments,” the chatbot said. “Instead of making payments to a lender as in a traditional mortgage, in a reverse mortgage, the lender makes payments to the homeowner.”
It then included a seven-point response including details like eligibility requirements, loan types and amounts, disbursement methods, the elimination of a forward mortgage payment, repayment requirements and details about remaining equity at the end of the loan.
“Reverse mortgages can provide financial flexibility to seniors who want to access their home equity to cover living expenses, medical costs, home improvements, or other financial needs without having to move,” the bot said. “However, they also come with fees and interest charges, and the homeowner’s equity in the home decreases over time as the loan balance grows. Therefore, it’s essential for homeowners considering a reverse mortgage to carefully weigh the pros and cons and seek financial counseling to make an informed decision.”
Reverse mortgage safety
When asked if reverse mortgages are “safe,” the chatbot compiled a response without a definitive answer.
“Reverse mortgages can be a useful financial tool for some older homeowners, but whether they are considered safe depends on individual circumstances and careful consideration of the associated risks,” the bot said.
It then displayed an eight-point response including factors a borrower can consider about product safety, including that the Home Equity Conversion Mortgage (HECM) program is regulated by FHA, reiterating the elimination of a monthly forward mortgage payment and a note about interest and fees, saying these things can “erode the equity in your home over time.”
The bot also said that the borrower retains ownership of the home, but that reverse mortgages will need to be repaid when a borrower wishes to sell, moves out or dies.
“This means that you or your heirs will need to repay the loan, often by selling the home,” the chatbot said. “If the home’s value has declined or if you’ve used up a significant portion of your equity, there may be limited funds left for you or your heirs.”
The answer also includes a note about the potential impact of a reverse mortgage on the borrower’s estate and on the home as a bequest asset, as well as information on how a reverse mortgage could result in a foreclosure while the property is still inhabited by the borrower: namely, failing to keep up with mandatory obligations including property taxes, homeowner’s insurance and property maintenance.
The bot also “recommends” exploring alternative products before going with a reverse mortgage.
“Before opting for a reverse mortgage, it’s important to explore other financial options, such as downsizing to a smaller home or exploring government assistance programs, which may provide financial relief without the long-term commitment of a reverse mortgage,” the bot said.
The answer also included information saying that it’s important to consult with a “reputable reverse mortgage counselor and carefully review the terms and obligations of the loan,” though makes no mention of such a counselor being FHA-approved. However, the answer did include the idea of speaking with a financial planner or estate attorney prior to making a final decision.
“Ultimately, the safety and suitability of a reverse mortgage depend on your individual circumstances and how well you understand and manage the associated risks,” the bot said.
Factually speaking, the answers from ChatGPT about reverse mortgages are mostly correct in terms of the broad strokes of regulation, potential utility and the importance for a borrower to vigorously research the product before making a decision. One area where these answers could be considered incomplete, however, comes from the acknowledgment of academic research about reverse mortgages and the importance of a consultative approach when interacting with seniors, and the ways certain costs are determined based on an individual borrower’s situation.
In a column published by The Street earlier this year, Mutual of Omaha Mortgage and Academy for Home Equity in Financial Planning industry professional Shelley Giordano described being generally satisfied with factual information about reverse mortgages from the chatbot, but also said that the rigidity of factual information can only take someone so far.
“So as far as it goes, ChatGPT does a basic job of covering reverse mortgages albeit in a simplistic and incomplete manner,” Giordano told the outlet. “We agree that it is important to ‘carefully consider the costs.’ What ChatGPT does not make clear is that the most significant cost in setting up a HECM reverse mortgage is the cost of FHA insurance. The benefits of FHA insurance are crucial to reverse mortgage safety, and why retirement experts have devoted a decade to understanding how a reverse mortgage properly used can amplify retirement security.”
When asked about the way it compiles responses, ChatGPT itself offered details about the considerations it is programmed to make. These include using natural language understanding to properly process a user’s intent, making note of contextual awareness based on other interactions with a particular user, processing the accuracy of information retrieved from a knowledgebase, and incorporating programmed ethical considerations regarding the avoidance of bias or harmful material.
The bot itself also included an answer encouraging ongoing human oversight of its technology.
“The process of constructing responses to user input can vary depending on the complexity of the system, the specific application, and the available technology,” the bot responded. “Modern AI models, like GPT-3, use large-scale deep learning techniques to automate much of this process, but human oversight and refinement remain crucial for ensuring high-quality responses.”