In the world of financial products, especially for seniors and retirees, a financial endorsement or cautionary note from an organizational body such as FINRA (Financial Industry Regulatory Authority) can make or break perception. Until recently FINRA, the financial industry’s self- regulator, referred to the use of Reverse Mortgages as the “Loan of Last Resort”. Now whether this label is just or not really doesn’t matter. Any label of this type will cause unnecessary fear and confusion and give likely beneficiaries pause.
The question then becomes is this an accurate depiction of the HECM Reverse Mortgage program? A loan of last resort may be a practical application for a Reverse Mortgage but it hardly does the program justice given all the benefits a properly tailored HECM Reverse Mortgage has to offer seniors and retirees.
Recently, FINRA has removed the “loan of last resort” verbiage from their industry alerts. They are now sanctioning it as a planning tool to help extend the overall life of one’s retirement assets. This change was in response to action their investigative task force recently completed.
The task force reviewed studies published in early 2012 by the likes of Barry Sacks, Ph.D. and Stephen Sacks Ph.D among others. This information is not new. It is clear that there are many noted benefits of tailoring a Reverse Mortgage as part of a person’s retirement plan. The question I take issue with is why it took so long for FINRA to come to this conclusion. I purchased the rights to redistribute these studies back in early 2012. It all makes sense but you have to read the studies and stop trying to compare a Reverse Mortgage to a traditional mortgage searching for immediate reconciliatory benefit. Maybe that is why it took FINRA so long. They were not able to effectively reconcile the program to communicate a credible position.
Beyond my speculation, I don’t know why it took those scholarly folks so long to see the light, but I can tell you the damage they have done as a result. In my view, with power comes responsibility and FINRA had the responsibility to provide a more thorough and equitable review of the HECM Reverse Mortgage.
The time frame prior to October 1, 2013 the government insured HECM Reverse Mortgage program was a steal of an entitlement deal for eligible homeowners. Homeowners had very generous equity advance limits with minimal restrictions that allowed them to pay off mortgage and take out cash and create income annuity streams etc. The program was so generous that congress had to allocate $1.7 billion to losses for FHA to cover losses attributed just from the Reverse Mortgage program. Simply put, the program parameters were too generous and people were living too long and getting benefits far exceeding expectations.
During this time FINRA, with the role to investigate financial products and effectively communicate, was thumbing its nose at the program and labeling it “the loan of last resort”. Why label it that way when you can just call it “stay away loser loan”. It pretty much says the same thing. The advisor community, taking their cue from FINRA and lacking informative credible direction on this product to take their own position, was also quite negative on the program and very resistant to any form of adoption. In essence, FINRA’s label gave everyone undo pause.
Fast forward to today. The HECM Reverse Mortgage program has been significantly revised with restrictions and suffered an across the board 15% curtailment in equity access. What does this mean for the common senior or retiree in this economy?
Now many seniors are not eligible for the program because they are short on eligibility. They do not have enough eligibility to obtain equity access to pay off their mandatory obligations, like mortgages, that are required with the Reverse Mortgage program. There is no allowance for a loan to make up the difference so they can get a Reverse Mortgage. That is not allowed. They either have to come up with the cash to bridge the gap or they cannot qualify for a Reverse Mortgage. This leaves many people fewer options and possibly forces them toward more risk with retirement. Many can still benefit but the pool of participants will be smaller.
It is not my place to criticize FINRA or imply that maybe they weren’t on top of their game this time around, although I feel I should bring this to the attention of everyone who has an interest. The negative endorsement has been removed. I believe now is the time for FINRA to redeem themselves and justify their past actions by taking the lead in effectively and thoroughly communicating with the advisor community regarding the HECM Reverse Mortgage. Seniors and retirees are a large component of our population now and even more so going forward. The HECM Reverse Mortgage will be integral in providing security and comfort in retirement for many that do their homework. Let’s judge the HECM Reverse Mortgage on the basis of merit, encapsulating all of its practical applications for our seniors and retirees, and not blindly on just one.
If you know someone that may have an interest in learning more about a Reverse Mortgage or if you are an advisor that would like another arrow in your quiver to help your clients and their family members, I would like to hear from you.
Blogging from the front line.
George H. Omilan
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