Senate Committee Targets Unsuitable Reverse Mortgages

Reverse mortgages are a beneficial tool for seniors who wish to convert their home equity into cash for living expenses or long-term care. In fact, according to the National Reverse Mortgage Lenders Association, this income-generating strategy has become increasingly popular, with lenders issuing more than 107,000 federally insured reverse mortgages in fiscal year 2007, up from 13,000 in 2002.

However, as reverse mortgages have become more common, so has the potential for abuse. According to the Senate Special Committee on Aging, which held reverse mortgage hearings on December 12, 2007, financial advisors may be persuading seniors to use their reverse mortgage proceeds to buy unsuitable annuities. “Some salesmen are . . . convincing seniors to swallow this double dose of bad financial advice,” said Sen. Herbert Kohl, D-Wis., at the hearing.

Prescott Cole, a lawyer representing the Coalition to End Elder Financial Abuse, said, “It is always inappropriate to use proceeds from home equity to fund deferred annuities. Funds from reverse mortgages are very expensive due to loan fees and insurance requirements.” He added that it’s impossible for deferred annuities to generate enough interest to offset the true costs of the reverse mortgage.

Rather than use reverse mortgages as a front end to annuity sales, advisors should always consider them on their own merit as a retirement funding vehicle. If you plan to discuss them with senior clients, learn how they work, build relationships with reputable reverse mortgage brokers, and know when reverse mortgages are suitable and unsuitable.

Courtesy of the American Association of Retired Persons (AARP), here are five questions to discuss with your clients about reverse mortgages:

1. Do they really need a reverse mortgage?
2. Do they have less costly options?
3. Can they afford a reverse mortgage?
4. Can they afford to start using up their home equity now?
5. Do they fully understand the mechanics of these arrangements?

For further information about reverse mortgages, visit the website of the National Reverse Mortgage Lenders Association (www.nrmlaonline.org).

What “Red Flags” are affecting your business? The National Ethics Bureau welcomes your input. Send your comments to: hlew@ethicscheck.com