The Federal Housing Administration (FHA)’s Home Equity Conversion Mortgage (HECM) program could be a source of reliable retirement funding, particularly when integrated with other sources like annuities and asset liquidation. However, it has not reached its potential due to the general aversion advisors have to the product.
This is according to Jack Guttentag, professor emeritus of finance at the Wharton School of the University of Pennsylvania, in a new column at Forbes.
“The three existing sources of retirement funds – financial asset liquidation, annuities and HECM reverse mortgages – are stand-alone products offered by different industry groups that have nothing to do with each other,” Guttentag writes. “As a result, the substantial synergies from combining them are unrealized.”
Part of the reason for this is a general “uninterest” that financial advisors have for reverse mortgages, the column says. This leads to a lack of consideration for any plan that incorporates reverse mortgages, he writes.
“HECM reverse mortgage lenders are completely specialized except for a few small commercial banks that offer them,” Guttentag writes. “This segmentation prevents retirees from selecting the combination of expected longevity and rate of return on financial assets that maximizes their spendable funds during retirement.”
Part of the problem is that the HECM program has unrealized potential.
“HECM reverse mortgages have never been used as a component of retirement plans, although that was their original purpose,” Guttentag explains. “They have been marketed as a stand-alone option for people in financial distress, and their public perception has been correspondingly abysmal – to the extent that advocates for the elderly such as AARP warn against them. Integrating HECMs into retirement plans should cause a major shift in attitudes.”
The reverse mortgage industry has often identified financial advisors as its most potent business referral source.
To rectify this, major lenders including Finance of America Reverse (FAR) and Fairway Independent Mortgage Corp. have engaged with financial advisor trade groups. These include the Financial Planning Association (FPA) for FAR and the National Association of Insurance and Financial Advisors (NAIFA) for Fairway.
