While use of reverse mortgages isn’t widespread, advisors should nonetheless brush up on the products, as they could become the next “hot topic,” according to Wade Pfau, professor of Retirement Income in the Ph.D. in Financial and Retirement Planning program at The American College of Financial Services.
Pfau, along with other retirement planning experts and advisors, weighed in on the topic of reverse mortgages for seniors during a joint meeting March 23 in Washington by The American College of Financial Services and the Bipartisan Policy Institute.
Jocelyn Wright, director of The American College State Farm Center for Women in Financial Services, said during a panel at the event, titled the 2018 Housing Wealth in Retirement Symposium, that she sees a lack of education about reverse mortgages among advisors’ clients as well as advisors themselves.
There are “a lot of misconceptions about reverse mortgages,” Wright said, with clients often “very reluctant to go into the conversation because their home is the largest asset and they don’t want to risk” losing it.
“There’s also more education needed among the advisor population,” Wright added. Advisors are often reluctant “to bring up the conversation with clients because they are not aware fully of all of the aspects of a reverse mortgage, which in many cases might be to their [clients’] detriment.”
Providing “comprehensive financial planning to clients” should include having a conversation about a reverse mortgage to determine “if it should be pursued.”
Wright said she’d encourage advisors to work with a reverse mortgage specialist to get a better handle on their benefits and drawbacks.
Pfau told ThinkAdvisor in separate comments that while reverse mortgages “are still not used prevalently,” with less than 2% of qualifying households using them, they should still be on advisors’ radar.
Why? “Home equity is such an important asset and interest is growing as the media now reports much more positively about reverse mortgages,” Pfau said. “More clients will have questions, and this could evolve into the next hot topic as Social Security claiming was several years ago.”
The new tax cut law also ushered in changes that impact reverse mortgages. While the tax overhaul eliminated deductions for home equity interest starting in 2018, deductions are still allowed for acquisition debt interest. If a reverse mortgage is used to buy a home, the debt is acquisition debt and interest on it is deductible.
Benjamin Mandel, executive director of J.P. Morgan Asset Management, who sat on the panel with Wright, said that in terms of baby boomers’ balance sheets “non-financial assets matter a lot.” Financial assets, he said, “only account for a third of growth in the baby boomer assets side of the balance sheet,” with “two-thirds [of growth coming from] nonfinancial assets — and that’s dominated by primary and secondary residences.”
Lori Trawinski, director of banking and finance at AARP Public Policy Institute, said that the public would “greatly benefit” from products other than the Federal Housing Authority’s Home Equity Conversion Mortgage loan program.
“To the extent that the proprietary market could focus on rebuilding itself and getting away from the government guarantee, that would help because … the Mutual Mortgage Insurance Fund is under great stress.”
The likelihood of Housing and Urban Development “taking action to tighten the program going forward I think is high because the existing book of business is going to continue to see losses,” she said.
AARP has “done a lot to support reverse mortgage consumers,” Trawinski said, but “much more work remains to be done.”
Nonpayment of property taxes and/or homeowners’ insurance “continues to lead to foreclosures and ultimately evictions for many older borrowers,” she continued, with the latest data from HUD’s 2016 actuarial report finding that, at that time, 89,000 loans were in tax and insurance default for nonpayment for the last 12 months. “That’s a pretty high number [as] at that time [there were] fewer than 600,000 loans outstanding.”
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