By Nick Thornton
Are reverse mortgages a viable alternative to funding retirement
BNY Mellon seems to think so. The New York-based global investment firm announced it will launch what it’s calling Home Equity Retirement Solutions later this year.
The investment bank’s new arm will buy reverse mortgages
from loan originators, securitize and service the mortgages, and establish communications and education tools for retirement advisors in an effort to market reverse mortgages as a viable source of retirement income.
Home equity conversion mortgages, or reverse mortgages, are not strangers to controversy. The loans, available to homeowners age 62 or older that either own their home outright or are close to it, are pitched as a useful source of cash-flow to retirees, allowing them to access equity without having to sell their home. Loan proceeds can help offset diminished income and defray increasing health care costs as borrowers age.
Unlike traditional mortgages, borrowers of reverse mortgages don’t pay down their debt in monthly installments, but rather the holder of the loan takes ownership of the home upon the death of the borrowers, or upon them leaving their home.
By original design, borrowers typically chose between a consistent income stream or a line of credit for major expenses such as health care costs.
But a 2012 paper to Congress authored by the Consumer Financial Protection Bureau found that borrowers were increasingly taking the full amount of their loan in an upfront lump-sum. Originators were willing facilitators of the trend, motivated by increased fees and interest on the large upfront payments. In many cases, borrowers used the lump-sum to refinance existing mortgages, and in other cases the lump-sum proceeds were invested elsewhere, exposing borrowers to the potential that they were earning less on their equity than they were paying in interest on their reverse mortgage.
The CFPB paper was also critical of the loans’ complexity, and of the mandatory education processes and tools for borrowers, which the paper found to be lacking.
Congress was ultimately convinced to tighten oversight. The Reverse Mortgage Stabilization Act of 2013, signed into law with bipartisan support, authorized the Federal Housing Administration, the primary regulator of reverse mortgages, to limit the amount of money that can be drawn at closing.
In doing so, the law helps “seniors make more responsible financial choices, preserving sufficient funds over the life of the loan,” according to a post on the Department of Housing and Urban Development’s blog.
The law also authorized the FHA to institute a financial assessment before granting loan approval, ensuring that borrowers had the ability to pay taxes, insurance and maintenance of their home. Based on the results of the assessment, the FHA can require “set-asides” from the loan to assure borrowers meet their requirements.
In a statement announcing the launch of Home Equity Retirement Solutions, BNY Mellon said it expects a number of new alternative retirement funding approaches, including reverse mortgages, will be required to offset “severe” underfunding in many retirement plans
“We view the funds generated by suitable reverse mortgages as an additional fixed income component of retirement portfolios, and important part of retirement planning that compliments other aspects of the plan,” said Michael Gordon, a director at BNY Mellon Investment Management.
Originally published on BenefitsPro.com