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No surprise: Advisers agree that reverse mortgages are confusing

Advisers agree with a new government report that says reverse mortgages are on the rise, but that they can be confusing to consumers.

Most financial advisers still shun reverse mortgages and aren’t surprised that many older Americans who tap their home for income this way are confused.
A Consumer Financial Protection Bureau study released Thursday reported a jump in the number of people taking out reverse mortgages at age 62, the youngest they can do so under the law. It also said the complex products are hard for people to understand, especially the falling equity nature of reverse mortgages.
“Reverse mortgages can be very complicated for seniors to understand,” said financial adviser Dennis Suckstorf, director of financial planning at Financial Advantage Inc. “If it wasn’t for the economy being down and people not having any money left, we don’t think that they would be used as much.”
He considers it “a last resort,” perhaps applicable to someone down to their last $5,000 but who still owns their home.
A reverse mortgage is a loan against home equity that doesn’t have to be repaid until the owner dies or sells the home. When the owner dies, the estate repays the loan, typically by selling the home, and pays interest and fees.
The CFPB report said 2% to 3% of eligible homeowners have a reverse mortgage, with about 70,000 new originations a year. It’s expected that the number of reverse mortgages will increase as baby boomers who haven’t saved enough for retirement seek income.
“Reverse mortgages are complex and have the potential to become a much more pervasive product in the coming years as the baby boomer generation enters retirement,” said Richard Cordray, director of the CFPB. “With one in 10 reverse mortgages already in default, it is important that consumers understand what they are signing up for and that it is the right product for them.”
The financial advisers at Abacus Planning Group Inc. have never recommended a reverse mortgage to a client, though some clients have asked about them.
“It would be most appealing for those who know they are going to age in place and may have a house where that value is one of their largest assets,” said Alex Chastain, an adviser with Abacus Planning.
Even then, the homeowner has to weigh the options and consider his or her life expectancy and health, “two things that are pretty hard to plan for,” Ms. Chastain said.
Some financial advisers in recent years have become more open to using reverse mortgages, not just as a last resort but as a tool for retirees during a down market. The products themselves also have improved.
The fees on reverse mortgages are lower today, and some have a built-in guarantee to make sure the homeowner doesn’t end up owing more than whatever the home sells for at death, said financial adviser Rachel Sanborn. There also are no income or credit score requirements, she said.
Her firm, Financial Focus Inc., is starting to consider using reverse mortgages in certain circumstances, such as using it as a line of credit in lieu of having to sell investments.
“We are looking at how it can be used as a backup plan in a down market,” she said. The firm hasn’t yet recommended one to a client.
Of course, it’s not for anyone who wants to leave their house to their children, Ms. Sanborn said.