Reverse mortgages have the potential to assist many older American homeowners with adequately funding their retirements, but a lack of understanding among borrowers and a deficit of willingness to discuss such options among financial planners are keeping reverse mortgage utilization generally low.
This is according to a wide-ranging panel discussion this week which took place at the 2021 Century Summit organized by advocacy initiative the Longevity Project, in collaboration with the Stanford University Center for Longevity. The reverse mortgage session, titled “Financing the Second Half of Life” was sponsored by Mutual of Omaha Reverse Mortgage.
The discussion featured Dr. Craig Lemoine, director of the financial planning program at the University of Illinois Urbana-Champaign and executive director of the Academy for Home Equity in Financial Planning; Dr. Wade Pfau, professor of retirement income at the American College of Financial Services and founder of RetirementResearcher.com; and actuary, consultant, author, and speaker Anna Rappaport. The discussion was moderated by Richard Eisenberg, managing editor of NextAvenue.
The state of modern financial planning
Setting the stage for the discussion, Eisenberg mentioned that the reverse mortgage industry has had reputational difficulties for many years stemming from a number of issues related to advertising and borrower outreach.
“For years, [reverse mortgages] have gotten a pretty bad rap and we’ve they’ve been scorned by many financial advisors who have called them a ‘last resort’ for retirement income,” Eisenberg said. “They had a history of high fees, pushy TV commercials with famous pitchmen, and some less than scrupulous lenders. But in the past few years, things have changed.”
Among the changes cited is the greater prevalence of reverse mortgage conversations among financial advisors, efforts by the government to regulate the reverse mortgage product and abuse prevention practices by bodies like the Consumer Financial Protection Bureau (CFPB). However, issues related to high upfront costs still mitigate the potential ability for a reverse mortgage to serve as a viable option for many people, Eisenberg contended.
Based on research projects she is involved in at the Society of Actuaries (SOA), Rappaport describes a need to change the shape of financial planning itself to include housing wealth at appropriate times.
“The type of planning that people do is often short-term and cash flow focused,” Rappaport said. “Rather than focusing on the rest of life, you’re looking at the next few years and their regular bills, not the unexpected. And some people don’t plan at all, so my first big message is that we need to expand the scope of planning and include housing wealth in it. Some big questions at different stages of thinking about housing, go beyond reverse mortgages, but reverse mortgages are certainly part of the picture.”
Later life planning relatively new, reverse mortgages can be a component
Dr. Pfau took things a step further by describing the concept of “retirement planning” as a relatively new concept of both planning and of study.
“Retirement income planning really is still a new field that we’re learning about,” he explained. “We’ve had wealth management and investment management, but retirement is different. The risks change in retirement. We know about this issue of longevity, and you have to plan for potentially a long lifespan as well.”
For those interacting with investments, the potential benefit for a reverse mortgage becomes clearer: use a reverse mortgage as a “buffer asset,” and draw from a line of credit when the market volatility is higher. Instead of simply waiting to open a reverse mortgage at a time of need, opening such a loan earlier in retirement could have a more beneficial impact on the ability to use a product to enhance stability on retirement as one component of a comprehensive plan, he explained.
“When we talk about the home, it’s not diversified, and it’s a large asset on the balance sheet,” Pfau said. “Retirees who are living long-term in an area may not see as much housing appreciation as national trends may imply. And so, it’s not necessarily efficient for them to just defer the home asset to spend at the end of retirement and to consider reverse mortgage at that time. By opening it sooner, there’s a line of credit that can be attached to it that grows throughout retirement. And in the low-interest rate environment that retirees face today, that can really facilitate having a better outcome by opening that line of credit earlier in retirement.”
Compliance environments for financial planners
Dr. Lemoine took aim at a different point of discussion, namely the increasing prevalence of financial planners who elect to discuss reverse mortgage options with their clients.
“1% of Americans have these reverse mortgage products,” he said. “I think to some extent, that may be a function of knowledge of the helper. The broker, the investment advisor, the financial planner, the CFP professional, even the insurance agent who we go to. […] What does the helper know? And I think that’s really one of the things that when we look at the education level of a helper in the reverse mortgage space, we’re seeing people catch up in that area.”
Previous research conducted by Dr. Lemoine and the Academy indicated that a difficult compliance environment often restricted these professionals from speaking with clients about products like reverse mortgages specifically, but also more broad restrictions were in place over anything that was debt-based, he said.
“I think to some extent, moving the needle on compliance markets actually starts moving the needle for helpers’ research, which moves the needle for consumers,” Lemoine said. “And so my takeaway is that there’s a lot of work to do, even in compliance spaces to say, ‘we want to encourage our frontline folks to do better talking about the world, about mortgages and talking about that refinancing, etc.’ That’s a very important thing we need to be doing.”