While compliance environments faced by investment advisory firms and broker dealers may often preclude those professionals from talking with clients about debt, the compensatory structure may also play a role. This has the potential not only to limit the understanding about products like reverse mortgages, but to limit the types of broad-based conversations necessary to effective retirement planning, something that needs to change for Americans to start planning for retirement sooner than they typically do today.
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.
Compliance environments for financial advisors, discussions of debt
After previously discussing some of what may prevent financial planners from discussing reverse mortgages specifically, Lemoine explained that even broader-based discussions about debt can present issues for certain advisors depending on the compliance environments they operate in.
“I think it goes back to provisions just on talking about debt in general,” Lemoine says. “When we have different lines of advice, we’ve got financial advisors, registered investment advisors, who are themselves fiduciaries with customers. And you’ve got your broker dealer agents, you’ve got insurance agents as well that have a slightly different suitability standard of care.”
At the end of the day, several professionals offer advice about retirement planning, which can lead to fractured compliance environments among professionals who speak to clients that could most benefit from the tapping of home equity.
“Part of the conversation becomes then [the understanding of] retirement as a complicated puzzle,” Lemoine adds. “You need cash flow diversification, and we can talk to somebody about an IRA and maybe we can talk to somebody about Social Security (and maybe we can’t), but when it comes to debt – and a reverse mortgage is debt, [albeit one]that provides a cash flow – are we going to allow someone to talk to you about debt? And I think that when you look as far as compliance environments, [these professionals all have] slightly different compliance environments.”
Encouraging broader-based retirement planning
Encouraging more people to think about retirement planning sooner in life should be a major priority for the United States, Rappaport said. Not only would broader-based retirement planning have the potential to lead more people to understand how they can utilize their homes, but it will lead to generally better outcomes for older Americans, she says.
“We really need to encourage people who don’t have an integrated income plan to have one,” she says. “And that might include a combination of some policy and work with the advisors. Craig’s discussion about the advisors, we have to remember that people are licensed and regulated in different ways as well as paid in different ways.”
Further development of policies and processes could create new efficiencies, potentially including the assurance that advisors are trained, paid and regulated in a way that would allow them to talk about components like debt, and assets like the home, she says.
“They also need to have the incentive and the ability to do it,” she adds. “It also means that the people that are producing the financial planning software, the tools and the support materials that they’re using need to be thinking about that bigger picture, and getting people to plan longer-term.”
Reverse mortgages as part of a responsible plan
In turning to Dr. Pfau, Eisenberg observed that much of what the panel had to say regarding reverse mortgages was generally positive. Eisenberg asked Dr. Pfau to expound further on points of contention regarding reverse mortgages, particularly advertising practices highlighted in previous years by the Consumer Financial Protection Bureau (CFPB), and upfront fees that are deemed to be impediments to affordability.
“[Reverse mortgages are] not for everyone,” Pfau says. “If you are thinking you’ll move in the next several years, I would suggest holding off. If one spouse is still under 62, there are provisions to protect them, but you might consider potentially waiting until both can become borrowers when both are 62. I’m talking about this as part of a responsible plan.”
That responsibility may be difficult for some people to observe, Pfau says. If a potential borrower simply can’t handle the additional liquidity that has been created because of the additional cash flow and may be predisposed to spend their loan proceeds frivolously, then a reverse mortgage may not be a good idea, he says.
“Anyone who may not be able to handle that liquidity should potentially hold off,” he says. “But beyond that, certainly I think it can be a consideration. There are some people who have mortgages that are also so high that they can’t really finance with a reverse mortgage, that might be another consideration. But 1% of the population uses reverse mortgages now. I don’t think it should be 100%, but I think there’s a large room of a lot more people that could potentially benefit from considering their use.”
While the upfront fees can look exorbitant, the upfront Mortgage Insurance Premium (MIP) that is often singled out as a culprit has a series of benefits that should similarly not be overlooked, according to Lemoine.
“One of the advantages of a reverse mortgage is that if you do have that drop after you have the product in place, one of the reasons that the underwriting costs are higher on a reverse mortgage is that we are paying into a system that helps protect the lender in case we do have that underwater event occur,” Lemoine says. “You’re paying a ‘premium’ insurance premium so that when you underwrite that note, if your house goes from a half-million to $300,000, you still get to live there. That reverse mortgage isn’t going to take the home. And when at some point you move out or pass on, your heirs aren’t going to be responsible for that difference because of that insurance premium we’ve got in place.”
Understanding the features of a reverse mortgage to a more specific degree could help people to digest the reasons that those upfront costs are higher, Lemoine adds.