A Home Equity Conversion Mortgage, or otherwise referred to as a HECM Reverse Mortgage, is considered a complex loan program. Fiduciaries and industry professionals across the board often get swept away with homeowners as they attempt to grasp a general understanding of the program. This usually ends in frustration and confusion as everyone attempts to understand the loan program on the basis of what we are already familiar with, a traditional forward mortgage. The program is actually not that hard to understand, provided you start by focusing on its purpose. The Reverse Mortgage instrument was created with a different purpose than that of a traditional mortgage. Once people pause and allow discussion on this point, understanding and clarity often follows.
Today we see the industry and various elements of the financial community pressing expanded applications for the Reverse Mortgage program in an attempt to promote understanding and curiosity. Terms and topics include “sequence of returns risk,” “portfolio survival”, and “the ability of housing wealth to buffer sequence of returns risk.”
What does all of this mean? In short, the answer is nothing. These concepts are misaligned with the original purpose for which the original foundation of the program was created. In other words, although these concepts may have merit, they are extremely complex to implement and maintain and they only serve to draw us away from the original purpose of the program and add a significant level of intimidation and complexity for older Americans.
In my opinion, based on countless discussions with retirees, this is not what the people want. Retirees and seniors crave simplicity as they attempt to plan and address issues and set goals in their lives. The primary purpose of a Reverse Mortgage is really to provide a means of mobility so retirees can more easily achieve independence and care for themselves. Simple things like paying off a mortgage or debt, or access to their home equity to supplement Social Security, or funds for care and so on. These are binary issues that they can connect with a need and understand. Questions like how do we get from point A to point B and achieve a more comfortable and more financially secure retirement without the constant money worry. No one that is no longer working wants to take risk with a complex angle on a loan product that they fear could cost them their home.
At the end of the day, all of the fancy write ups on complex applications for a HECM are simply that, write ups. Simplicity wins the day and the primary purpose of the program should not be clouded with complexities. If the industry and the financial community really would like to see the HECM Reverse Mortgage come into its own and really serve the retirement community, we really need to promote more simplicity, because it is a terrific program obscured with much skepticism that only serves to undermine its merit.