Have you seen TV or direct mail ads for reverse mortgages? I'm going to guess that you have, especially recently, since the volume of mail ads has increased dramatically over the last few years.
The most common type of reverse mortgage is the home equity conversion mortgage, or HECM. Insured by the Federal Housing Administration, the program "enables you to withdraw a portion of your home's equity to use for home maintenance, repairs, or general living expenses," per the U.S. Department of Housing and Urban Development website (tinyurl.com/39fcd5n2).
According to the Consumer Financial Protection Bureau, the volume of reverse mortgage direct mail ads increased from 11 million ads per year in 2019 and 2020 to 44 million in 2021 and 48 million in 2022 (tinyurl.com/mrykhpys).
Who is the audience? Largely low- and middle-income households, with 74% of the direct mail ads going to age-62-or-older households with incomes below $75,000. A CFPB analysis of 2021 1-year American Community Survey data indicated that this demographic (age and income) represents 53% of U.S. households. According to U.S. Census Bureau, 78.9% of householders age 65 and older owned their own home as of the second quarter of 2023. (Source: Table 7, Homeownership Rates by Age of Householder, tinyurl.com/32dhy423.)
The ads go beyond acquiring a reverse mortgage. They are also directed to households that already have a reverse mortgage, with offers of refinancing, which raises a concern. About 51% of the ads that went to people in the West region were refinancing ads in 2021-2022.
Overall, about 84% of direct mail reverse mortgage ads went to people living in states in the South and West during 2021 and 2022, "where a somewhat higher share of older homeowners report difficulty making ends meet and difficulty making mortgage payments."
The CFPB cautions: "[T]he increase in ads for reverse mortgage refinances are concerning in that they suggest lenders may be targeting existing reverse mortgage borrowers for costly closing costs rather than providing them with a new product that reduces the effect of economic hardship."
The idea behind reverse mortgages is helping older homeowners with financial needs. However, "[t]ypically, a reverse mortgage is a more expensive product than other home loans. For some older adult homeowners, using their equity to avoid monthly mortgage payments is a tradeoff they are willing to accept," reports the CFPB. "For others, it's a product that jeopardizes their financial security and may prevent them from leaving their home to their heirs."
The CFPB goes further: "Although the intent of the HECM program is to meet the needs of older adult homeowners with lower incomes the data nevertheless suggests that reverse mortgage lenders are potentially targeting vulnerable populations with an expensive product that may not be best suited for their individual housing and financial needs" (tinyurl.com/mrykhpys).
While the recent CFPB study focused on direct mail ads, TV ads for reverse mortgages have been prevalent for some time. In a 2015 CFPB study, focus group participants "reported seeing television advertisements frequently, even several each day" (tinyurl.com/5f7kc4k9). The ads "frequently feature celebrity spokespeople."
However, none of the participants could read the fine print used in the TV ads. Many consumers "expressed surprise when shown a printed ad stating interest rates." Several participants believed that reverse mortgages were "provided by the government and that therefore repayment would not be required."
While reverse mortgages can create a safety net in the right cases, they can backfire in the wrong cases. As always, be prepared to do your homework before getting a reverse mortgage.
How? Here are some resources:
1. If you plan to do a reverse mortgage, participate in a required consumer information session given by a HUD-approved HECM counselor (tinyurl.com/33avv9ku).
2. The CFPB provides an overview of reverse mortgages at tinyurl.com/3456m2jc.
3. The Federal Deposit Insurance Corp. also offers information about reverse mortgages at tinyurl.com/5n6kz5rv.
A reverse mortgage may be the right decision for you, but be sure to do a deep dive into the details before you agree to one.
DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION
View CommentsI recently received a call from a reader with an interesting dilemma. "Meryl's" husband was about to retire. The couple had used a few traditional stockbrokers whom they enjoyed working with over the years. One of them proposed they purchase an investment that they didn't understand, a certain type of complex annuity.
They wanted to go ahead with the purchase based on the recommendation, but they weren't sure of what they would get in return for the investment. Where could they go for help? "And, oh, by the way," Meryl added, "we don't want to pay anything for advice."
Again, an interesting dilemma. If this had been a plain vanilla annuity that pays a lifelong income stream with no penalties or complexities, it would have been a different story. However, that was not the complex product that was shown to this couple.
My first suggestion was to go back to the broker to ask for disclosure documents and the contract. Then, ask the broker to review them, with a focus on helping the couple understand the very basics, such as:
-- Why are you recommending this particular product?
-- What else have you considered?
-- What will you get paid if I buy the product?
-- After I buy this product, what can I expect?
-- Can I take out money at any time?
-- Are there restrictions on when and how much I can take out?
-- Are there any penalties?
-- And, please show me where I can find the answers in the contract and disclosure documents.
By the way, if the broker doesn't want to tell you about his or her compensation for the sale, don't hesitate to go to another broker. If the broker says, "Oh, don't worry about that, you don't pay anything," go to another broker.
Only consider buying such a product if you can easily explain how it works to a friend -- after reaching conviction based on understanding the benefits and pitfalls described in the contract and other disclosures.
So that's the "free advice" route. Don't forget that the broker is not working for free -- he or she gets paid when you purchase the product.
If the fee is external, it is visible. If it's internal, it is not visible. In either case, the broker gets paid; he or she is not working pro bono.
Let's go further. It is always important to understand the cost of "advice" before purchasing a product or service. Cerulli, an international research and consulting firm, noted in its recent U.S. Advisor Edition that a certain type of person ("self-directed") has "little trust in financial providers" and is "not willing to pay for financial advice." Meryl and her husband seem to fall into this category. That's why they need to do their own homework. And, if they don't reach a level of conviction that the product achieves their goals, good for them. That's definitely a wise decision, since every investor has options.
The most important takeaway is to look at retirement as a transition that is unlike any other. The paycheck stops, but expenses continue, and the sources of cash to pay those expenses need to be understood. Some will come from Social Security and pensions; some will come from savings or investments.
Financial management of a household involves knowing your numbers for today and factoring in the loss of purchasing power due to inflation and taxes in the decades ahead.
A different set of investment rules govern after your retirement, all built around managing cash flow. Someone has to do that analysis for this couple before they even begin to think about what investments to buy. They can also do that themselves, of course, without needing to pay for the service. But will they? We'll have to wait and see.
If you have a situation you'd like me to discuss anonymously in this column, send me an email (readers@juliejason.com). While not all emails can be chosen for discussion, all of them are read and considered.
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View CommentsDo you suffer fear of missing out, or FOMO? Are you preoccupied with the thought that you should have purchased a stock before a massive gain? Stocks like Super Micro Computer and Carvana (both up about 800% in a year) come to mind, along with the Magnificent Seven. (To find these top performers, log into finviz.com -- tinyurl.com/3bbc94e3.)
I've told the story before of talking with a conservative retiree in January of 2000 who wanted to sell the holdings in his balanced portfolio to buy internet stocks, because the returns were high at the time, his friends were making money and he did not want to be "left behind" -- a classic FOMO moment. The internet bubble burst a few months later, as the NASDAQ market reached a peak in March of 2000, then dropped 78% by Oct. 9, 2002.
There is always the next trend, the next hot item that is calling for your money -- whether it be a new vehicle, trendy new fashion or an investment extraordinaire.
Lori Schock, the director of the U.S. Securities and Exchange Commission's Office of Investor Education and Advocacy, addressed FOMO in a 2022 Director's Take article headlined "Say 'No Go to FOMO'" (tinyurl.com/2u7j6e8v).
Her views are relevant in today's market. Schock discussed the surge in online investing, digital assets (including crypto currencies) and meme stocks, along with the accompanying promotions by celebrities, but then she makes the key point that "Not every investment opportunity is right for everyone," even if those around you are hopping on those investments. And of course, "market swings are inevitable."
Some stocks -- perhaps those that trigger FOMO -- may need to be seen differently than others. The seasoned investor will keep emotions out of the picture and either stay away or limit exposure to a small, very small, amount of money. The rationale: There has to be a very good reason to buy a stock after it's made a dramatic move.
A retiree needs to be wary. A young trader needs to have a selling discipline. Everyone in between needs to limit exposure to sums of money that can be sacrificed should the upward trend reverse.
If you consider the bigger question of market swings, it's just better from a portfolio point of view to diversify. As Schock points out, the best way "is to create an investment portfolio that has a mix of assets, such as stocks, bonds and cash." For help in understanding what's involved, the SEC provides educational resources for you at the Investor.gov website (tinyurl.com/2s3a3a6y).
When it comes to volatility, if you are thinking of trying to time the market by getting out before a big decline and getting back in "at the right time," Schock notes that "No Go to FOMO" applies to that as well, adding, "It's time in the market that counts, not timing the market."
The 2024 "Guide to Retirement" (tinyurl.com/457jsd5t) by J.P. Morgan, a financial services company, provides a solid example of that in its "Impact of being out of the market" section. If you stayed in the market the entire time between Jan. 1, 2004, and Dec. 29, 2023, you would see a 9.7% total return on your investment. But, if you missed the 10 best days, your return would be 5.5%. Miss the best 30 days? You are down to 0.7%. As the guide points out, "Seven of the best 10 days occurred within two weeks of the worst 10 days." That's a hard thing to time correctly.
Let's turn FOMO on its head and ask: When can fear of missing out be a blessing? Schock suggests if you don't have a saving and investment plan, you need to create one as soon as possible. Investor.gov has free financial planning tools at tinyurl.com/ytran965. Another: Pay off high-interest debt. And, a favorite of mine: Participate in your company's 401(k) plan, maxing out an employer match (if there is one) and taking advantage of the "power of compounding."
In the end, "stick with your long-term plan and don't make investment decisions based on a fear of missing out." This is Schock's final message. It could not have been stated better.
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