The Compelling Research that Helped Change FINRA’s Position
In 2008 FINRA issued an investor alert cautioning borrowers against reverse mortgages and suggesting they only be used as a last resort. In 2013, one notable research paper, “Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income” (Barry H. Sacks, J.D., Ph.D. and Stephen R. Sacks, Ph.D.), took to task the seminal notion that using reverse mortgages as a last resort was best. The writers discovered that the prevailing position–HECMs should only be established after the portfolio was nearly exhausted–was not correct. What the math and science showed was:
“If you use the reverse mortgage credit line in a coordinated fashion—meaning timing it so that it just fills in the down parts of the volatility cycle of the securities portfolio, the portfolio lasts much longer, and most important for any retiree, the cash flow survives much longer. It survives so much longer that in many cases, it doubles the probability that the cash flow will last as long as the retiree does.” – Dr. Barry Sacks
The research-based argument and Dr. Sacks’ subsequent conversation with FINRA was so powerful that in October 2013 it led them to change their “reverse mortgage as a last resort” position and remove the language from their investor alert.
{Video} Dr. Barry Sacks – Why Reverse Mortgages Are Not a Last Resort
{Video} Dr. Wade Pfau – What Is FINRA’s Position?
2019 – FINRA on Reverse Mortgages
Below is the revised FINRA investor alert; you’ll notice the “last resort” language has been removed. Now the tone and verbiage of the new one is measured, reasonable and re-assuring. It’s clear that FINRA has no opposition to reverse mortgages, but quite the contrary. They see value in having the consumer “weigh all the options.”
However, if a financial advisor doesn’t know how the reverse mortgage fits in retirement income planning, they can’t help their clients do the very thing for which FINRA is advocating. Reverse mortgage education for advisors seems not only to be a wise course of action, but a fiduciary and/or suitability responsibility (at minimum).
Read more on FINRA’s website: Reverse Mortgages – Avoiding a Reversal of Fortune and What You Should Know About Reverse Mortgages
Would you bake a cake without a recipe? Would you practice medicine without first going through residency? It’s risky to talk about reverse mortgages without a foundation in education AND application. Get your training today from the Housing Wealth Certificate Course.
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Supplemental Reading
[March 13, 2008]
FINRA News Release: FINRA Warns Senior Investors About Reversing Fortunes With Reverse Mortgages
The Financial Industry Regulatory Authority (FINRA) issued an Investor Alert today urging homeowners over the age of 60 to carefully weigh all of their options before tapping into their home equity through reverse mortgages to obtain additional income for their retirement years.
A reverse mortgage is an interest-bearing loan secured by the equity in a home and can be helpful to homeowners having trouble meeting expenses. The FINRA Alert cautions homeowners that these loans – which are being aggressively marketed as an easy, cost-free way for retirees to finance lifestyles or to pay for risky investments – can jeopardize their financial futures.
The new Investor Alert, “Reverse Mortgages: Avoiding a Reversal of Fortune,” explains how these loans, often called “rising debt” loans, allow borrowers to convert their home equity to cash to be used for any purpose. The Alert advises homeowners considering these types of loans to use the funds wisely. The Alert goes on to warn investors that if they are approached by a financial professional to do a reverse mortgage in order to fund a particular investment, they should keep in mind that all investments carry risk and costs – and the higher the promised return, the higher the risk. And, in some cases, those who sell the mortgages may profit from the sale of the proposed investment, giving them twice the incentive to talk someone into a loan they may not need.
“Reverse mortgages are an extremely costly way to fund an investment,” said FINRA CEO Mary L. Schapiro. “Homeowners need to consider all the risks and explore all of their options before taking out a loan that may prematurely deplete their home equity, which is often a homeowner’s most valuable asset and most precious source of retirement security.”
The Alert explains that reverse mortgages were originally designed as a tool for aging, low-income homeowners to keep their homes. Now, as more and more Americans are retiring and sitting on large pools of home equity, they are beginning to use reverse mortgages as a way to finance a more extravagant retirement lifestyle than they could otherwise afford. The Alert reminds borrowers reverse mortgages should generally be a last resort and offers tips to anyone considering these types of loans.
FINRA No Longer Describes Reverse Mortgages as “Last Resort Loan”
Reverse Mortgage Daily
Research conducted by a Security 1 Lending-assembled Funding Longevity Task Force has led to the Financial Industry Regulatory Authority (FINRA) no longer describing reverse mortgages as a “loan of last resort.”
The financial sector’s self-regulator removed a statement from its published investor alert that stated previously reverse mortgages should be used as a product of last resort, an action the task force says was taken on the basis of recent research it has reviewed.
The Funding Longevity Task Force’s goal is to eliminate reverse mortgage misconceptions among financial planners and regulators in order to benefit retired homeowners and the reverse mortgage industry as a whole. Task force participants reviewed recent findings from academic investigators including Gerald Wagner, Ph.D., Jack M. Guttentag, Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania, and Shaun Pfeiffer, Ph.D., associate professor at Edinboro University.
Ongoing academic investigation yields growing proof that housing wealth, when used conservatively early on in retirement, can sustain cash flow, the task force notes.
“I am pleased that FINRA has made this important change to their Investor Alert, but there is still much work to be done,” said Alex Pistone, senior vice president of Security 1 Lending, in a statement. “The Task Force is now looking to engage the industry’s compliance officers and software companies to encourage the use of housing wealth as a financial planning tool, all based on the solid research that has been done.”
Task force members include John Salter, Ph.D., CFP, Associate Professor of Financial Planning at Texas Tech University, Barry Sacks, Ph.D., J.D., comer physicist and and tax and pension lawyer, Sandra Timmermann, Ed.D., former Director of MetLife’s Mature Market Institute, Rita Cheng, CFP, CEO of Blue Ocean Global Wealth, and Shelly Giordano, Director of Business Development for Security 1 Lending.
The bottom line to all of these strategies, though, is fairly straightforward: reverse mortgages may work far better when they’re done not as a last resort, but as a part of an ongoing retirement plan.
-Michael Kitces, Partner and Director of Research Pinnacle Advisory Group
Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®
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Categories: Advisors, Financial, Financial Planning, Topics
Tags: CFP, Financial Planning, FINRA
