Reverse mortgage products have a lot of potential utility for older American homeowners, but many consumers remain skeptical of their usefulness due to lingering reputational problems and institutional aversions, despite becoming more regulated in recent years.
This was part of a series of perspectives shared on Morningstar’s “The Long View” podcast by American College of Financial Services professors Don Graves and Wade Pfau. The pair discussed some of the misconceptions, advancements and potential use cases for reverse mortgages.
Some of the topics broached in the discussion include the attitude of the Financial Industry Regulatory Authority (FINRA) toward reverse mortgage products and improper pairings with annuities that led to that organization’s outlook. The podcast also touched on ways for retirees to use the products in pursuit of retirement security, as well as the regulatory changes that the Federal Housing Administration (FHA)’s Home Equity Conversion Mortgage (HECM) program has gone through over the years.
“It seems like every few years, the government decides to adjust some of the parameters of the program, always working to strengthen it for the long term,” Pfau said. “And so, in 2013, 2015, 2017, we saw a lot of changes.
“One was to create protections for eligible non-borrowing spouses (NBS). One of the rules of the HECM is you have to be at least 62 years old to be a borrower, and that created a potential conflict for couples where one person was over 62, the other was under 62.”
Prior to these NBS changes, a spouse was in danger of settling the loan — i.e., paying it back or having to sell the home — when the borrowing spouse died or moved out. Following these protections, the non-borrowing spouse is able to remain in the home as long as basic homeowner obligations are met.
Pfau also discussed changes including the Life Expectancy Set Aside (LESA) and the financial assessment, and how these changes were instituted by FHA with an eye toward strengthening the program for the end borrower.
Graves also mentioned the counseling requirement, where a borrower has to attend a session with a U.S. Department of Housing and Urban Development (HUD)-certified counselor to gain full understanding of the loan prior to closing.
“It’s very helpful because it takes the onus away from the lender or the financial adviser,” Graves said. “And the purpose of it is to make sure that the client understands what’s going on [and to ensure] there’s no cognitive impairment. And they get a certificate from [HUD] saying they’ve completed HECM counseling and that they’ve met the requirements of understanding. … It’s a wonderful safety feature.”
The group also discussed the “appropriateness” of a reverse mortgage for a borrower who may have a strong motive to leave the home as a asset to an heir; the HECM program’s nonrecourse feature stemming from FHA insurance; and how interest rates affect a reverse mortgage’s utility.
“Reverse mortgages are the one retirement income tool I’m aware of that [can] actually benefit from a low interest rate environment,” Pfau said. “And that’s just because you have a higher borrowing capacity when interest rates are lower. So, as interest rates rise, it’s going to lower the borrowing capacity through the reverse mortgage. But that being said, we’re still not really in a scenario where interest rates are very high.”
Pfau bases that conclusion on modeling historical data and using simulations of reverse mortgage terms, he said.
“When I do historical simulations using historical data with reverse mortgages, we’re nowhere near that point where interest rates are so high that there’s not value from a reverse mortgage,” he said.
Pfau added that an example of a scenario in which that point might be salient would be in 1982. But that was also roughly seven years before the HECM program came into existence, he said.
