Reversal of fortune: Home equity makes a comeback for retirees
Ever since the dark days of the financial crisis, advisers and clients have been skeptical about reverse mortgages.
Many people still remember hearing about elderly people being tossed out of their homes because they couldn’t pay their taxes and had their reverse mortgages terminated by banks.
Advisers without mortgage licenses are barred from taking fees for recommended reverse mortgages and often didn't see any reasons to suggest them to clients. Bankers worried about reputational risk, and some compliance officers recommend just saying no to clients who asked about them.
Increasingly though, some advisers and some financial advisery firms are starting to view reverse mortgages as an important part of the retirement planning process, particularly since a set of reforms were imposed by the Federal Housing Administration and the Department of Housing and Urban Development in 2013.
And even though no big banks offer reverse mortgages these days, some smaller regional banks such as Dollar Bank in Pittsburgh and Fulton Bank in Lancaster, Pa., are providing competition to the specialty firms that have been a staple among late-night TV ads.
FINRA is also coming around.
In the past, the self-regulatory body warned that reverse mortgages should only be recommended as a “last resort” for clients with no other sources of support besides the equity in their homes.
This past year, though, recognizing reforms in the products, such as mandating an independent financial consultation and running a financial assets check on borrowers -- requirements that now better protect borrowers from being ousted from their homes -- FINRA changed its recommendation.
The regulator now says only that reverse mortgages should be “used prudently.”
Don Graves, president and founder of Wyncote, Pa.-based HECM Advisers Group and a faculty member at the American College of Financial Services in Bryn Mawr, Pa., says, “You can’t be a proactive financial planner and just pretend home equity doesn’t exist.”
As for those advisers who ask how they can make any money on a product if they are barred from getting fees for recommending it, he says, “You can’t get paid to recommend a reverse mortgage, but you’re going to make money because you’ll be taking care of your client.”
Steven Sass, program director at the Boston College Center for Retirement Research, says that reverse mortgages make sense not just for low-income people who want to stay in their homes but also for wealthier retirees who have considerable equity but want to goose their income streams.
“You can say reverse mortgages need to be part of the retirement plan discussion,” he says.
This story is part of a 30-30 series on preparing for retirement.