Recheck the Math on Reverse Mortgages

Tara Twomey is just a keen observer of the consumer finance world, and she recently alerted me to a trend. Reverse mortgages are being aggressively hawked as a valuable financial planning tool, and the media is picking up the story. Even the reverse mortgage industry rag is excited at its publicity rash. While I'm all for consumer finance journalism, these articles often report on studies that bear little resemblance to most Americans' situations.

First a quick definition of reverse mortgages: a loan secured by a home that pays the homeowner money based on accumulated home equity with loan repaid in the future. In its most straightforward form, the homeowner gets a lump sum of cash and must repay the loan when she dies (presumably out of the proceeds of the house that is sold upon her death.)  Reverse mortgages are a complex product marketed specifically to older Americans. (If you doubt the complexity, read Tara's great article that ponders how a reverse mortgage should be treated in a homeowner's bankruptcy.) Precisely for this reason, FHA requires counseling for its reverse mortgage, called a Home Equity Conversion Mortgage (HECM).

While we can hope that homeowners receive adequate information and make fully-informed decisions, the chatter about reverse mortgages is starting out their inquiry into reverse mortgages with some questionable math. The problem isn't the math itself, of course, but the assumptions. In a typical example featured in these stories, the couple owns a $400,000 home and has retirement savings of $1 million. Yeah, you read that right--tax-deferred, non-social security retirement savings of a cool mil'. Reality: about one-third of Americans have no retirement savings/pension at all. Even among those in the 55-64 year age bracket, one in five has zero dollars in retirement savings. Zero--to state the obvious--is a long way from $1 million. Even after excluding those with no savings,  the typical account balance of near-retirement households was only $104,000. Again, a long way from $1 million.

Long ago, when Elizabeth Warren was building support for the CFPB, she argued there needed to be a dedicated "cop on the beat" for consumers. Check out the press release, CFPB Study Finds Reverse Mortgage Advertisements Can Create False Impressions, for evidence that the CFPB is hard at work in educating consumers. While its study identified more fundamental confusion about reverse mortgages, those attracted to the financial promises in reverse mortgage research or ads should check the math against their own means.