Last week’s article proposed capping cash draws in the early years of a home equity conversion mortgage (HECM) in order to discourage participation by seniors looking for the largest possible cash draw. The purpose of the HECM program is to help senior homeowners finance their retirement, not to deplete all the equity in their homes at the outset of retirement. These cash-out borrowers also impose the largest drains on the FHA’s reserve fund.
The second challenge facing HUD/FHA is to attract more of the seniors for whom the HECM program was intended. There are millions of them whose lives would be enriched with HECMs who haven’t taken them. The reason they haven’t is that they are either unaware of the program’s existence or they are aware of it but their impressions of the program are based on poor information:
- Negative media coverage from ill-informed writers that stokes fears of losing their home.
- Lack of support from consumer organizations whose attitudes toward HECMs range from ambivalent to hostile.
- Inability or unwillingness of HUD/FHA to do anything of an educational nature that would counter these negative influences.
HUD/FHA does support HECM counseling, which is required on every transaction. However, the only seniors who are counseled are those who have selected a lender, which means that they are among the few who have overcome the misinformation hurdles listed above. Since misinformation discourages seniors from ever contacting a lender, counseling is not a remedy. What is required is an educational program.
Educating seniors about HECMs: using the Internet
While HECMs are a bit complicated, seniors need not be rocket scientists to understand everything that they need to know to make a rational decision on whether or not they want one. Because HUD’s website is heavily trafficked and has credibility, it should be the focal point of the Internet-based part of the educational effort. I propose a three-pronged approach.
- A Web page that summarizes the potential uses of HECMs for different purposes, with links to articles that provide more detailed information about each use. The title of this page could be Can a HECM Reverse Mortgage Help Me?
- A calculator that allows a user to adjust upfront cash, monthly payment and credit line in proportions that best meet their individual needs. The title of this page could be Design Your Own HECM.
Yes, you guessed it, my colleagues and I have developed all of these, and am prepared to license them for HUD’s use on its site at no charge.
Educating seniors about HECMs: live seminars
Not all seniors use the Internet, so other thrusts are needed. Live seminars around the country, publicized through newspapers and other hard-copy media, could draw seniors who would not otherwise have any way of finding out about HECMs. The thoughts to follow are very tentative and sketchy, designed to stimulate further thought and discussion.
- Seminars require seminar leaders who must be trained, for which purpose training materials must be developed. My colleagues and I are prepared to participate in this effort.
- Could FHA’s 81 district offices serve as implementers, arranging for the seminar site, needed facilities, and publicizing the seminar in local media?
- The industry, through its trade group, the National Reverse Mortgage Lenders Association (NRMLA), ought to contribute since the process would expand the market and is therefore in the long-term interest of the industry. However, it should not be involved in any way that could be interpreted as the industry influencing seminar content.
- Financial planning organizations ought to be involved, since planners whose clients are facing or in retirement should be knowledgeable about how HECMs might be used in a retirement plan. A handful of planners recently have discovered HECMs, but most of them are still in the dark. Among other things, planners might qualify as seminar leaders.
- It would also be useful to enlist participation by insurance companies and mutual fund companies that cater to retirees, such as TIAA/CREF and Vanguard. The retirement pages on both their sites contain information about a wide range of advisory services to retirees, but there is not a single reference to HECMs on either of them.
- Invitations could also be given to selected consumer organizations and media people as a step toward dislodging the negative images so many of them have of HECMs.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Note that the writer is paid by reverse mortgage loan providers for leads originating on his website, and therefore has a financial interest in expanding this market. Comments and questions can be left at www.mtgprofessor.com.
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