Reverse mortgages are making a comeback and the CEO of Generation Mortgage Co., a reverse mortgage lender, is convinced the seniors’ loan program will become a fourth leg of the retirement income stool along with savings, pensions and Social Security.
The key is for financial advisors to learn the advantages and pitfalls of reverse mortgages, says Colin Cushman, CEO of Generation Mortgage based in Atlanta.
Reverse mortgages, or home equity conversion mortgages, should be seen as a potential financial planning tool, rather than something desperate seniors use as a last resort for cash, Cushman says. He warns seniors who take a reverse mortgage loan in a lump sum that they have to be prepared for the consequences. Seniors who use the entire loan in a lump sum can run out of money later in retirement.
Instead, advisors should consider the different options available for their clients who are thinking of a reverse mortgage.
“A lot of advisors do not know much about reverse mortgages, so they shy away from them,” Cushman says. He hopes to change that and boost the sales of reverse mortgages at the same time.
“The future of reverse mortgages is absolutely terrific,” says Cushman. “Approximately 80 percent of seniors say they want to age in place, and about half are considering using their home equity to help fund retirement. At this point, there are 24 million households with residents age 62 or older, and half of those hold more than 50 percent of their net worth in home equity. In short, the market is enormous.”
Reverse mortgages have come under heavy scrutiny in recent years as some seniors were caught off guard by the fees or by spouses or heirs trying to repay the loan after the mortgage holder dies or moves out.
"As with any mortgage product, there is risk to financing a loan, but we have made, and continue to make, significant efforts to mitigate that risk," both when making loans and when recovering money at the end of the loan, said Melanie Roussell, a spokeswoman for U.S. Department of Housing and Urban Development. The FHA, which guarantees reverse mortgages, is part of the department.
Several options exist for borrowers other than taking the money in a lump sum. The money can be used as a line of credit that provides regular payments to the borrower, thereby making his or her portfolio last longer. It can be used as an alternative to the portfolio when the market is down. Or it can be used like an insurance policy to be drawn on in emergencies. If money remains when the borrower dies, it is available to heirs, adds Cushman, who was director of portfolio analysis at FHA before joining Generation.
Technology will add transparency to the reverse mortgage industry, allowing financial planners and prospective borrowers to better understand how using the various options could affect their overall financial planning, he says. One such program is Generation’s nu62.com, which allows advisors to run different scenarios to determine what each decision could mean to a borrower.