During my lifetime, retirement planning has become more and more challenging. People are living a lot longer, which makes retirement periods longer, and fewer people retire with employer-provided defined benefit pension plans. On the positive side of the ledger, the rate of homeownership is higher, home equity is a major part of the wealth of seniors, and we now have the HECM reverse mortgage program that allows home owning retirees to convert that equity into spendable funds. This is a well-designed program with government insurance protecting both the retiree borrowers and the lenders who fund them.
The problem is that very few homeowner retirees use the program. While about a million homeowners retire every year, fewer than 60,000 HECMs will be written this year.
WHY THE HECM MARKET IS STUNTED
The fundamental reason is that most senior homeowners view reverse mortgages with anxiety, suspicion and distrust. HECMs are complicated, and very different from the mortgages they used to buy their homes many years earlier. Further, the capacity of retirees to process information about something that is new and complex is not what it had been. In addition, their home is at stake and the last thing they want to do is risk losing it.
While seniors see many ads for reverse mortgages, they don't recognize any of the lender names. And while TV ads using celebrity spokespersons succeed in attracting some seniors to individual lenders, the ads repel many others; on balance, they may shrink the market.
The market for HECMs is highly dysfunctional. Marketing costs are high and markups are 2 to 3 times larger than they are in the forward mortgage market. There is no way for prospective borrowers to shop effectively for the best deal, which is itself a major source of anxiety.
MANDATED COUNSELING DOESN'T HELP
Because the Federal Government insures HECMs, and because elderly homeowners are a politically sensitive constituency, the HECM market is highly regulated. Under a counseling requirement that is unique to reverse mortgages, HECM lenders cannot accept an application from a borrower unless the borrower presents a certificate attesting to the successful completion of a mandated counselling session with a certified counselor committed to covering a long list of topics required by HUD. The problem with the list of counseling topics is that its focus is preventing sins of commission, where seniors take reverse mortgages who shouldn't. But the major problem is sins of omission, where seniors who badly need a reverse mortgage, don't take one. The existing counselling system doesn't deal with this problem.
THE COUNSELING SYSTEM THAT IS NEEDED
It should focus on the threefold problem of the senior contemplating a HECM reverse mortgage: