Roughly 60% of homeowners at or approaching the age of 62 continue to make forward mortgage payments, a sizable expense as many people during that phase of life are transitioning out of their jobs and into a fixed-income environment. A reverse mortgage’s elimination of a monthly mortgage payment may provide needed financial relief for these seniors, argued Jack Guttentag in a new column in Forbes.
“Such retirees, concerned (as most are) with having enough spendable funds during their retirement years, should take out a HECM reverse mortgage,” he writes. “This holds whether the HECM is used to pay off the existing mortgage or not. Yet less than 5% of them take a HECM, and those that do are more likely to use it to meet immediate needs rather than to strengthen their retirement.”
Guttentag says HECMs are not used more commonly to bolster retirement plans due to the product’s general complexity.
“[Other issues include] the vast amounts of misinformation that pervades the literature, and a widespread marketing thrust that caters to the temptation faced by retirees to draw cash upfront to meet current needs,” he writes. “There is virtually no marketing addressed to the potential role of HECMs in retirement planning.”
Guttentag says that a combination with an annuity could make a reverse mortgage more viable, but there are legal restrictions that largely prevent any firm from offering both.
“While HECM lenders and annuity providers would both gain from acquisition of the capacity to combine HECMs with annuities, developing safeguards that comply with the law would be difficult, if not impossible, for either,” he says. “The problem is that a major purpose of the safeguards is to prevent collusion by lenders and insurers, and any system controlled by one of them would be prima facie suspect. Credible safeguards must be provided by a third party whose financial interest is in establishing and monitoring the safeguards.”
Guttentag contends that he has developed such a mechanism, but he may also be understating the efforts of the reverse mortgage industry to position itself as the purveyor of a retirement planning tool.
Earlier this year, HW Media and RMD hosted an event with reverse mortgage professionals at three different levels — a product educator, an originator and a retirement planner — as they explained their own efforts in positioning a reverse mortgage as a retirement planning tool.
Some lenders are also hiring retirement planning experts to explain the potential benefits of such a strategy directly to financial planners, while academic authority financial planners have hosted speaking engagements and written books to explain the potential utility of incorporating a reverse mortgage into a retirement strategy.
Read Guttentag’s column at Forbes.
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