The issue of insurance sales representatives persuading older consumers to take out reverse mortgages and then put the proceeds or other assets into annuities came up at a congressional hearing last week.
Lawmakers, consumer and interest group representatives talked about the issue during a hearing on reverse mortgages organized by the Senate Special Committee on Aging.
Sen. Claire McCaskill, D-Mo., who chaired the hearing, said older consumers have long been targets of predatory lending, including in the reverse mortgage market.
“Seniors who have worked their entire lives to be able to enjoy retirement should not be victimized by people out to make a buck,” McCaskill said in a statement. “We need to have adequate protections in place to ensure only those who would benefit from a reverse mortgage qualify.”
Sen. Herbert Kohl, D-Wis., suggested that problems with marketing of reverse mortgages might be connected with annuity marketing problems.
“Some salesmen are…convincing seniors to swallow this double-dose of bad financial advice: Take the cash from a reverse mortgage and use it to fund an unsuitable annuity,” Kohl said, according to a written version of his remarks.
“As this committee determined at our Sept. 5 hearing, long-term annuities are almost always inappropriate for seniors, as they can tie up retirement savings far beyond one’s life expectancy,” Kohl said.
Carol Anthony, a King City, Calif., resident accused a sales representative of selling her own mother a reverse mortgage and shifting money into an unsuitable annuity, from a bond fund, in separate transactions
“The municipal bonds had been paying mom a nice monthly income,” Anthony testified at the hearing, according to a written version of her remarks. “Now, she would have to wait until her 100th birthday to see a cent of her money.”
Later, “I was able to buy back her house and amicably settle the annuity issue,” Anthony said.
Prescott Cole, a lawyer who represented the Coalition to End Elder Financial Abuse, San Francisco, at the hearing, said the coalition believes it is “always inappropriate to use proceeds from home equity to fund deferred annuities.”
“Funds from reverse mortgages are very expensive due to loan fees and insurance requirements,” Cole said. “It is impossible for a deferred annuity to generate interest that would offset the true costs of the reverse mortgage. Furthermore, the deferred annuity places the senior’s assets out of the senior’s control for years with substantial penalties and fees for early withdrawals.”
Current reverse mortgage “counseling” focuses only on verifying that older consumers understand the terms of the loan, not on helping the consumers to understand whether a particular loan is a good deal or whether it is appropriate, Cole said.
Cole recommended that members of the Senate Special Committee on Aging act to “prohibit the predatory practice of using reverse mortgage equity to fund deferred annuities.”
A third witness, Donald Redfoot of the ARRP Public Policy Institute, Washington, recommended during his testimony that state and federal agencies should “develop new cost disclosures and suitability standards for reverse mortgages that are used to purchase investments, annuities and long term care insurance.”
Redfoot also talked about AARP research on the reverse mortgage market, and AARP released a new batch of reverse mortgage data.
About 31% of all the 345,762 reverse mortgage loans insured in the 21-year history of the reverse mortgage program were issued in fiscal year 2007, AARP analysts found.
Only 1% of older households now have reverse mortgages, the AARP analysts estimate.
The share of individuals ages 45 and older who have heard of reverse mortgages increased to 70% this year, from 51% in 1999, but consumer interest in the products has declined.
Although long term care finance experts often list reverse mortgages as a possible vehicle for paying for LTC, the share of older consumers who say they are willing to consider getting a reverse mortgage has declined to 14%, from 19%, the AARP analysts report.