The promise at the inception of the HECM reverse mortgage program was that the program would strengthen the retirement plans of homeowners with limited wealth. Inclusion of the HECM reverse mortgage in retirement plans that last for the retiree’s life was an objective. Until now, however, that promise has not been kept. The HECM has been a stand-alone product, not part of integrated retirement plans.
HECMs contribute very little to retirement planning. Most of them meet the immediate needs of retirees in financial distress.
Why Are HECMs a Stand-alone?
Early in its development, the market was beset by collusion between a few lenders and annuity providers who combined HECMs and annuities in ways that generated exorbitant fees from homeowners. To curb this practice, a new Section 255(n) of the National Housing Act prohibited HECM lenders from any association with parties that offered “any other financial or insurance activity.” Since annuities are essential to any retirement plan that protects retirees until death, this provision in effect mandated that the HECM be offered as a stand-alone product.
But this onerous provision contained an escape hatch. This was a system of safeguards or firewalls that would ensure that HECM originators had no financial incentive to direct annuities to their borrowers, and imposed no requirements on borrowers to purchase annuities.
For understandable reasons, no HECM lender has developed a system of safeguards that would allow them to integrate HECMs with annuities while complying with the law. Because a major purpose of the safeguards is to prevent collusion by lenders and insurers, any system controlled by one of them would be prima facie suspect. The safeguards must be provided by a credible third party whose financial interest is in establishing and monitoring the safeguards.
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The Safeguard Now Exists
A system developed by Mortgage Professor LLC (MP), including extensive consultation with counsel, meets all the requirements of Section 255(n), and more so. Here is how it would work for a HECM lender.
- The lender’s loan officers would become MP-certified retirement plan advisors.
- Loan officers would work with clients to find the optimum integrated retirement plan using the analytics provided by MP.
- The HECM prices used in the comparison would be those posted by the lender on MP’s HECM price network, allowing clients to check the competitiveness of their price.
- The annuity prices used in the model would be the best of those included in MP’s annuity price network. The identity of the insurer is not disclosed except in the case where the client requests it.
- The lender has no contact with the insurer, and no funds are transferred between them.
- MP is paid the insurer’s posted commission; it is not paid by the lender.
This procedure goes beyond Section 255(n) safeguards by protecting clients against overcharges by HECM lenders, as well as overcharges by annuity providers. The HECM market today is beset by so many complexities that, aside from borrowers who find the MP network, price shopping is impossible.
Benefits of the Safe-Guarded System
HECM Lenders and Annuity Providers: Their benefit would be substantial growth in their markets, especially in the HECM market. As one indicator, about 60% of the homeowners reaching 62 today have outstanding mortgage balances. MP analytics indicate that the great majority of them would increase their spendable funds during retirement by paying off the existing mortgage with an integrated HECM/annuity plan. Yet with today’s structure, less than 5% of them pay off their mortgage with a HECM.
Homeowning Retirees: The benefits to them would be enormous.
- A retirement plan that integrates a HECM with an annuity provides lifetime protection that is unavailable with a stand-alone HECM.
- Retirees can select a variety of options regarding how they draw funds during their retirement.
- Their decision process is facilitated by graphical displays, showing spendable funds and estate values over the remainder of the retiree’s life.
- The amount the retiree leaves to her estate can be modified with a Set-Aside created for that purpose.
- A Set-Aside can be subject to a worst-case option that can be drawn on if needed to offset shortfalls in spendable funds.
Federal Government: It would benefit because, with integrated retirement plans, HECM borrowers defaulting on their property taxes would decline, reducing claims on the mortgage insurance reserve fund.
The author is chairman of Mortgage Professor LLC, which developed the safe-guard system described here, and which would profit from its implementation.