Reverse mortgages have gotten ‘a makeover’
Reverse mortgages have often been described by both industry insiders and outside observers as having a reputational problem with the general public. However, as more product reforms have proliferated on the side of the Federal Housing Administration (FHA)-sponsored Home Equity Conversion Mortgage (HECM) program and as lenders have developed their own private-label reverse mortgage products, the tide may be beginning to turn.
This is according to a new feature published in the Wall Street Journal, which interviews financial advisors and reverse mortgage industry experts to paint a broader picture of how the reverse mortgage product and industry have changed over the course of the past decade.
Wade Pfau is a financial professional who has openly discussed the utility of a reverse mortgage for senior clients.
“For decades the industry’s image was tainted by horror stories about borrowers who faced foreclosure, and surviving spouses who were evicted,” the article begins. “But today, these products — first introduced in 1961 — have evolved into tools that, with federal insurance and oversight, often do what was originally intended: ease financial burdens for retired homeowners with limited incomes who want to stay in their homes until death.”
This is evident in the number of borrower protections that reverse mortgages have as product features, including limits on loan amounts; the non-recourse feature in case the home being borrowed against accrues a higher loan balance than the value of the property; and a raft of new protections implemented to protect non-borrowing spouses (NBS) from being displaced should the primary borrower pass away or move out of the home.
“Reverse mortgages still represent just a small part of the financing options that senior homeowners choose to meet their needs in later life,” the article reads. “And there are still some downsides to HECMs, such as high upfront fees. The burden of paying off the loan, meanwhile, falls on your heirs, though they have the option of keeping the house if they do pay off the loan.”
The article enlists input from financial planners including Wade Pfau, well-known in reverse mortgage circles and who recently released an updated edition of his book on the topic which he previously spoke to RMD about.
The article also discusses the specifics of the product with Steve Irwin, president of the National Reverse Mortgage Lenders Association (NRMLA) and academic researcher John Salter, who has helped create highly influential literature on the topic of reverse mortgages.
The article also offers caveats that are similarly discussed openly by reverse mortgage professionals.
“It is wise to have a financial adviser guide you through the process of deciding whether an HECM is right for you, and choosing the best payment option if so,” it reads. “If you miscalculate on the payouts, you could outlive the proceeds.”