Financial Planners Fence Reverse Mortgage Over CFPB Report-induced Criticisms


Criticisms over reverse mortgage products prompted by the release of Consumer Financial Protection Bureau's (CFPB) report in June failed to prevent the wave of published research upholding the value of reverse mortgage in retirement planning.

In its August issue, the Journal of Financial Planning, the official publication of the Financial Planning Association, published an article heralding Home Equity Conversion Mortgage (HECM) Saver as a risk management tool.

Researchers John Salter, Shaun Pfeiffer, and Harold Evensky believed that a strategy they termed as standby reverse mortgage (SRM) could increase a senior's chance to meet retirement goals.

Under the SRM strategy, cash flow reserve (CFR) two-bucket strategy is combined with HECM Saver with line of credit as the payment plan. This strategy limits use of HECM Saver for bear markets or periods of decline in the stock market. With HECM Saver, a senior will have a source of cash during bear markets, avoiding the forced liquidation of assets at lower prices.

CFR strategy utilizes a portion of a retiree's investment portfolio equivalent to up to two years of needs called the first bucket and is placed in money market and short-term bond investments. Conversely, the remaining fund, which is called the second bucket, is invested in a total return portfolio according to the retiree's investment plan.

HECM Saver is another Federal Housing Authority (FHA)-backed reverse mortgage loan, which has lower upfront loan closing costs compared to HECM Standard.

As per the list in the Housing and Urban Development's (HUD) website, HECM Saver and HECM Standard have five acceptable payment plans namely tenure, term, line of credit, modified tenure and modified term.

Of the five, Salter, Pfeiffer, and Evensky favor line of credit because the said payment plan gives a senior a full control of the schedule for the loan's disbursement and the amount for each payout and paying the loan back if chosen. Additionally, the unused line of credit grows over time under the line of credit payment plan.

Salter, Ph.D., CFP®, AIFA®, is an assistant professor of personal financial planning at Texas Tech University and wealth manager at Evensky & Katz Wealth Management in Coral Gables, Florida, and Lubbock, Texas, while Pfeiffer is a Ph.D. candidate in personal financial planning at Texas Tech University, and associate professor in the Department of Business and Economics at Edinboro University in Edinboro, Pennsylvania. Harold Evensky, CFP®, AIF®, on the other hand, is a research professor of personal financial planning at Texas Tech University and the president of Evensky & Katz Wealth Management.

Aside from Journal of Financial Planning, Smart Money also ran an article dated August 7 written by Alicia Munnell titled Reversing the Negative Views of Reverse Mortgage. Barry Sacks, pension law and retirement planning practitioner, also published his own take on the CFPB Report via the National Reverse Mortgage Lenders Association (NRMLA) website.

The CFPB Report pointed out that reverse mortgage products are too complex for seniors to understand and counseling is not enough to offset the effects of misleading advertisements and aggressive sales tactics in the industry. While there are indeed issues to be addressed within the industry, the report failed to include assessments from HECM borrowers in the development of its key findings, which earned flaks from industry practitioners and financial planners alike.


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