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Reverse Mortgages Aren’t For Everyone, But Could They Be?

Even the most tireless advocates of the Home Equity Conversion Mortgage agree that it’s a product with a specific use for a certain subset of people. That definition has expanded over time, naturally, from the early days of the reverse mortgage as a loan of last resort, to today’s big-tent approach that positions the products — especially the HECM line of credit option — as the potential cornerstone of a smart retirement plan, particularly for those without pensions or significant 401(k) savings.

But even with the gradual expansion of the HECM dragnet to include borrowers who don’t have an immediate need for funds, the loans remain niche products: In 2016, an admittedly down year for HECMs, the industry generated 48,732 endorsements, compared to 56,363 in 2015, according to data from Reverse Market Insight. For comparison purposes, real estate research firm CoreLogic found more than 976,000 home equity lines of credit opened in just the first three quarters of 2015.

So faced with these facts, RMD set out to ask players in the industry a simple question: If the HECM product isn’t perfect, how could it be made so? Or, if that’s too big of an ask, how could it be modified to benefit the greatest number of people possible?

Even in just a small sample size, the answers that came back were diverse in scope, ranging from structural problems within the loan itself, to the way the products are serviced, to the manner in which they’re presented to the public. And while there may not be a silver bullet HECM that could help everyone, the breadth of the suggestions and criticism within the industry shows there’s definite room for improvement.

Education and marketing challenges

Even with all of the positive press surrounding HECMs in recent years, and the earnest educational efforts of many operators in the industry, an knowledge gap remains between HECM advocates and the average consumer.

Don Giorgio, CEO and president of United Northern Mortgage Bankers, Ltd. in Levittown, N.Y., quoted an old series of commercials for the Syms chain of discount men’s clothing stores, likely familiar to millions who lived in the New York metropolitan area: “An educated consumer is our best customer.”

“There’s got to be more education to the public on how to facilitate a lifestyle change through the use of a HECM mortgage,” Giorgio said, before echoing the familiar line. “And in some cases, that tool might not be appropriate for their lifestyle.”

But instead of blaming the HECM itself for the lack of public understanding and widespread appeal, he pointed a finger to those who have misused and mis-marketed the product in the past, likening reverse mortgage to pit bulls. For years, Giorgio said, he owned a sweet, affectionate pit bull — one whose demeanor was so laid-back that his own mother didn’t even realize it was a pit bull even after caring for it.

“And you can take that same breed and make it a ferocious, dangerous animal,” Giorgio said. “It’s not the dog that’s the problem; it’s the handler that’s the problem. And that’s the same thing with the HECM product.”

To combat this, Giorgio called on the industry to shift the public focus away from highlighting punishment of bad actors to the promotion of the best and brightest in the industry, suggesting a Good Housekeeping-style seal of approval that would indicate the most trustworthy lenders in the business.

“As an industry, [we need to] highlight the companies that do the right thing, highlight the people who do the right thing,” Giorgio said. “And that allows people to see what should be happening, and puts us in a better position to sell the product.”

Servicers must step up

While loan originators and brokers can sing the praises of HECMs for years, once the loan closes, the servicing aspect is completely out of their hands — a situation that can also contribute to consumer wariness of the product.

“The statements, for one, are very confusing,” said Steven Sless, a branch manager at Home Point Financial in Owings Mills, Md. “We’re in the industry, we see them every day; sometimes they get confusing to my loan officers.”

Sless says he frequently hears complaints from consumers who can’t easily reach their servicing companies with questions, or even when they wish to tap into their HECM lines of credit. But a key public-relations issue arises when the heirs of a deceased reverse mortgage borrower have trouble getting clear, prompt answers from the servicing company.

“If they have a bad experience, they’d never have a reverse mortgage 10, 15 years down the road, and they tell all of their friends,” Sless said, adding that perhaps servicers should hold heir counseling sessions, similar to those that prospective borrowers must complete before receiving a loan.

Giorgio agreed, claiming that reverse mortgages are serviced in much the same fashion as regular “forward” loans — a problem for seniors that may not be as financially savvy or knowledgeable about the unique servicing requirements of a reverse mortgage. Clearer information about tax requirements from servicers is a start, but in order to prevent tax and insurance defaults, Giorgio also suggested that the government must improve its tax billing procedures, perhaps even allowing seniors to pay property taxes monthly instead of once or twice per year.

“The government must step in and create a user-friendly tax bill in order [for seniors] to be able to comprehend, understand, and act upon so that they cannot inadvertently default on their taxes,” Giorgio said.

Regulation helps, but confuses

Increased government regulations, such as the institution of Financial Assessment rules and caps on the total draw amount, have undoubtedly helped improve the stability of the HECM program — but at what cost?

“By making too many changes too quickly, it also confuses those of us in the industry who are looking out for the best benefit of the borrower,” Sless says. “And you’re just throwing up roadblocks. I don’t think it’s going to improve the program by doing that. I just think it’ll cause less people to benefit from the program.”

Costs remain a barrier

Shelley Giordano, chair of the Retirement Funding Task Force, noted the gulf between low-income and more affluent borrowers, putting the onus on the industry to improve its outreach to higher-end consumers — and perhaps lower the fees to make it more attractive to Americans of all income levels.

“It feels terrible, and it feels like a ripoff,” Giordano says, noting that more and more “Middle Americans” might choose to tap into a HECM line of credit and forget about it until a rainy day — that is, if it was cheaper to set up initially.

She also touted the partial-payment angle — a marketing tool that, as RMD reported, has paid dividends for Reverse Mortgage Funding — as a way to dispel the image of the HECM as either too good to be true or a tool only for the desperate who have no hope or intention of paying.

“We were always marketing to people who couldn’t possibly make a payment, and so those were the kinds of people who took out reverse mortgages,” she said.

“It was mis-marketed for two and a half decades, and we just really missed the boat on that.”

This edition of the RMD Report is sponsored by national appraisal management company Landmark Network.

Written by Alex Spanko