Is the Reverse Mortgage as simple as some claim? Or is it a highly complex financial tool, as the Consumer Financial Protection Bureau describes it?
While it may appear that these views are mutually exclusive, they are not. However, the underlying concern is one that congress, regulators, financial planners, lenders, and consumers all need to better understand.
THE REVERSE MORTGAGE CONCEPT
The reverse mortgage concept is simple and can be explained in a sentence or two. In its most basic sense, a reverse mortgage is any loan program that defers the repayment obligation until a later date.
More specifically, it offers a homeowner the ability to use a portion of his/her home’s equity, it creates a lien, and it delays repayment until the home is no longer the primary residence of the last borrower. That is pretty basic and easy to understand. This holds true for all reverse mortgages, including the Federally Insured Home Equity Conversion Mortgage (HECM), single-purpose reverse mortgages offered by local government entities, and proprietary reverse mortgages.
THE HECM PRODUCT
However, the “concept” of a reverse mortgage and the “product” itself are quite different.
The Consumer Financial Protection Bureau (CFPB), which is charged with a degree of oversight of the mortgage world, believes the reverse mortgage is complex. In 2012, the CFPB commented on the complexity of the HECM product in their 231-page Report to Congress stating,
“Reverse mortgages are inherently complicated products that are not easy for the average consumer to understand.”
Looking back, it’s hard to imagine this was said in 2012. At the time, training and education on the product was relatively easy. All that was needed was to simply educate mortgage originators and clients on the program guidelines, the non-recourse feature, principal limit factors, product options, payout options, and costs.
REGULATORY CHANGES
Only 15 months after the CFPB report was published, the program saw massive regulatory changes. These changes from 2013-2015 were intended to protect the HECM program, protect the consumer, and ensure the product was used as a sustainable solution for homeowners. Nevertheless, in a short period of time, the complexity of the reverse mortgage product doubled.
Does that mean the product is complicated? Not necessarily. The issue is not one of complexity, but rather a lack of familiarity. The HECM product is misunderstood simply because the terminology and concepts are somewhat unfamiliar.
As a result, industry training is quite different now, including the addition of the following concepts: initial disbursement limits, non-borrowing spouse, and financial assessment.
IS THE REVERSE WORLD MORE COMPLICATED THAN THE FORWARD?
I received what many believed was the best forward mortgage training available when I entered the industry. Completing it took me away from home for several weeks. Having a comprehensive understanding of the forward side DOES takes time. In fact, forward originators must now comply with TRID requirements which is not mandated for the reverse side… yet.
But, while various forward product options each have their own credit requirements and debt-to-income ratios, most consumers already understand the dominant product – the 30-year fixed conventional loan. By contrast, the dominant reverse product (The HECM) and the terminology that accompanies it are relatively unknown.
Once again, the primary issue for mortgage originators, financial service professionals, and consumers alike is becoming familiar with the HECM product.
Note: To be a licensed mortgage loan originator, the standardized testing (SAFE Exam) generally includes only one question on the topic of reverse mortgages.
DO NEW REVERSE MORTGAGE STRATEGIES INCREASE THE COMPLEXITY?
Yes. Wendy Peel, VP of Sales and Marketing at ReverseVision, notes that “much of the complexity lies within the varied strategic uses of the new reverse mortgage product.” Prior to 2013, reverse mortgage sales had little to do with financial planning and more to do with how much money the borrower could receive. In 2013, the program began limiting many borrowers to an initial disbursement of 60% for the first year. This, combined with an increased focus on sustainability, shifted the product back towards the financial planning uses for which it was originally intended.
Mathematically, research shows us the financial planning advantages are significant. Unfortunately, many loan originators, consumers, and most financial planners are still uncertain how to use reverse mortgages to open up retirement cash flow options and strategically manage portfolio draws in retirement.
IS IT WORTH EXPLORING?
Yes. Don’t let the unknown discourage you. The primary reason I wrote the book, Understanding Reverse, was to answer the most common questions, summarize the program guidelines, and document the regulatory sources. In fact, one of my greatest pleasures is receiving emails and letters from loan originators and consumers who thank me for clarification gleaned from the book.
The HECM product is the most under-utilized financial tool available to enhance the lives of older homeowners. We can easily solve the perceived complexity problem with proper education, not just offered to the loan originators, but also to financial service professionals, realtors, the media, and the clients themselves.
Yes, the concept is beautifully simple. Yet, the product appears complex because of a lack of familiarity with regulatory changes and appropriate financial planning uses. As we continue to develop new ways to explain this great program to a broader audience, I know we can build a better understanding of reverse mortgages.
I’d love more discussion on this topic. So, please let me know your thoughts? If you wish to attend my national broadcast on the Financial Assessment changes on October 3rd, please register by clicking this link:
Financial Assessment Review and Updated Compensating Factors
Dan Hultquist is the Director of Learning and Development at ReverseVision and authored the top-selling book on this topic, Understanding Reverse – 2016.