The promise at the start of the HECM reverse mortgage program was that the program would boost retirement plans for homeowners of limited wealth. Including a reverse mortgage (HECM) in retirement plans that lasts the life of the retiree has been a goal. However, this promise has not yet been fulfilled. HECM has been a standalone product, not part of integrated retirement plans.
HECMs contribute very little to retirement planning. Most of them cater to the immediate needs of cash-strapped retirees.
Why are HECMs standalone?
Early in its development, the market was surrounded by collusion between a few lenders and annuity providers who combined HECMs and annuities in ways that resulted in exorbitant fees from homeowners. To curb this practice, the new Section 255(n) of the National Housing Act prohibited HECM lenders from having any association with parties offering “any other financial or insurance activity.” Since annuities are essential to any retirement plan that protects retirees to death, this provision actually provided for the introduction of HECM as a standalone product.
But this grueling judgment contained an escape hatch. This was a system of guarantees or firewalls that would ensure that HECM originators had no financial incentive to direct annuities to borrowers, and did not impose any requirements on borrowers to purchase an annuity.
For understandable reasons, no HECM lender has developed a system of guarantees that would allow them to combine HECMs with annuities while complying with the law. Since the main purpose of collateral is to prevent collusion by lenders and insurance companies, any system controlled by one of them would be suspect at first sight. The guarantees must be provided by a trusted third party who has a financial interest in establishing and monitoring the guarantees.
Protection is now
A system developed by Mortgage Professor LLC (MP), including extensive counseling with an attorney, meets all requirements of Section 255(n), and more. Here’s how that works for a HECM lender.
- The lender’s loan officers will become MP-certified retirement plan advisors.
- Loan Officers will work with clients to find the best integrated retirement plan using the analytics provided by MP.
- The HECM rates used in the comparison will be those posted by the lender on MP’s HECM rate network, allowing customers to check the competitiveness of their rates.
- The annual rates used in the model will be preferable to those listed in the MP annuity rate grid. The identity of the insurance company is not disclosed unless requested by the customer.
- The lender has no connection with the insurance company, and no money is transferred between them.
- MP pays the declared insurance company commission; Not paid by the lender.
This action bypasses the safeguards set forth in Section 255(n) by protecting customers from excessive fees by HECM lenders, as well as excessive fees by annuity providers. Today's HECM market suffers from so many complications that, apart from borrowers who find MP network, it is impossible to purchase rates.
Benefits of a safe guard system
HECM Lenders and Pensioners: Their interest will be significant growth in their markets, especially in the HECM market. As one indicator, about 60% of homeowners who hit 62 today have outstanding mortgage balances. MP analyzes indicate that the vast majority of them will increase their spendable money during retirement by paying off their existing mortgage using an integrated HECM/annuity plan. But with today's structure, less than 5% of them pay off their mortgages through HECM.
Pensioners who own homes: The benefits to them will be enormous.
- A retirement plan that combines HECM with an annuity provides lifetime protection that is not available with a stand-alone HECM.
- Retirees can make a variety of options regarding how they can withdraw funds during their retirement.
- Decision-making is facilitated by graphic displays, which show spendable money and property values over the remainder of the retiree's life.
- The amount the retiree leaves for her property can be adjusted by setting a set-up for this purpose.
- The 'side assignment' can be subject to a dependable worst case option if necessary to make up for the shortfall in expendable funds.
Federal government: You'll benefit because, with integrated retirement plans, borrowers who default on their property taxes will decrease, reducing claims on the Mortgage Insurance Reserve Fund.
The author is the president of Mortgage Professor LLC, which developed the Safe-guard system described here, and which would benefit from its implementation.