For financial services companies, it sounds like a match made in heaven — reverse mortgages and long-term-care insurance.
Theoretically, encouraging seniors to use the proceeds from the mortgages to pay for the insurance would juice sales of the two products, both of which have been slow to take off.
But a step the Department of Housing and Urban Development took this month to create such an incentive has generated little enthusiasm among providers of reverse mortgages or long-term-care insurance — while alarming consumer advocates.
HUD issued an advance notice of proposed rulemaking. Its plan would waive the sizable up-front federal mortgage-insurance premium for a reverse loan if the borrower agrees to use the proceeds to pay for long-term-care policies.
The providers say doing so probably will not generate any significant increase in sales, in part because of constraints on what the department can do in the 4-year-old law authorizing the incentive.
Still, linking reverse mortgages with long-term-care coverage may be just the tip of the iceberg when it comes to government efforts to make these loans more palatable — an area of increasing interest amid the burgeoning costs of caring for an aging population.
AARP agrees that there is no real demand for a package of the products, according to Don Redfoot, a senior policy adviser at the influential seniors group.
However, Mr. Redfoot said, AARP believes that if incentives were created for such packaging, consumer abuse would probably result.
In AARP’s view, most of the seniors who would use the package would do so as the result either of confusion or unscrupulous sales tactics, he said. The fear is that those marketing the packages would claim that the government “effectively endorses” what AARP views as a high-cost and risky strategy.
Even HUD sounds lukewarm on the idea and still unsure about several important aspects of making it work. Asked why the department is pushing forward the idea now, a spokesman would cite only the congressional mandate and said in an e-mail that “it is very early yet” in the rulemaking process.
The plan was published in the Federal Register Dec. 3. Comments are due Feb. 1. It would implement an amendment to the National Housing Act that was tacked onto the American Homeownership and Economic Opportunity Act of 2000.
“Home equity conversion mortgages,” guaranteed by HUD’s Federal Housing Administration, account for the vast majority of reverse mortgages. They let people over 62 take equity out of their homes without repaying until they die or move.
For its guarantee, the FHA normally charges 2% of the maximum claim amount up front, then 0.5% each year. The amount available — in a lump sum, a line of credit, or regular payments — is determined chiefly by the age of the youngest member of the household, interest rates, and likely appreciation.
High up-front costs are considered one of the product’s major drawbacks. Home equity loans, for instance, often come with no fees or insurance premiums. Origination fees on reverse loans run as high as 2%. Appraisals and other third-party services are typically required.
Sales of the product have been steadily rising. They more than doubled in HUD’s last fiscal year, to about 37,000, but that is still a small fraction of the potential market, according to the National Council on the Aging, which says seniors could now tap about $953 billion of equity to finance their long-term care.
According to lender and insurance executives and past studies, several issues should limit the usefulness of creating incentives to buy long-term-care insurance:
- As the law is written, seniors would have to commit to using their home equity proceeds only for the insurance.
- The demographics of the two products do not match. The insurance is much more expensive for individuals in the age group that typically takes out reverse mortgages, while the loan proceeds are lower for younger borrowers.
- Along the same lines, many seniors already have disabilities or illnesses that would prevent them from getting any long-term-care policy.
- The insurance is typically thought of as a way to protect assets, whereas a reverse mortgage would deplete wealth that would otherwise be protected in many states.
- And AARP says that financing the premiums with a loan gets too costly, and that seniors would risk using up their equity before they needed the care.
Joseph DeMarkey, who oversees reverse mortgage sales in the Northeast for BNY Mortgage Co., one of the four major reverse lenders, said plenty of people use the loans to pay for long-term-care, but “I’ve never seen somebody actually purchase” such insurance with loan proceeds.
(Mr. DeMarkey is a vice president at BNY Mortgage, a joint venture of Bank of New York Co. and Everbank Financial Corp.)
Frank Zurlo, the senior vice president of financial services at Webster Financial Corp.’s insurance operation, said, “Really, the issue is, if you’re dealing with long-term-care insurance when you’re 70 years old, it’s cost-prohibitive.”
Consumers in their 50s typically pay between $3,000 and $4,000 annually for a long-term-care policy, he said, while a policy for people in their 70s can cost closer to $8,000. Webster sells both the insurance and the loans.
Shortly after the 2000 law was passed, the National Reverse Mortgage Lenders Association issued a press release in which its president, Peter Bell, called the idea “a very insightful provision.” But in an interview this month Mr. Bell said problems with the concept soon became apparent.
Mr. Bell said his group would not support implementing the incentive “as is,” because it would have little effect. Rather, HUD should hold off until the measure can be packaged with other changes, he said.
And Fannie Mae, which declined several requests for interviews, buys most government-insured reverse mortgages and could simply decide to turn away loans packaged with the insurance.
A risk for any buyer of the loans would be that the FHA guarantee could lapse if the borrower’s equity runs out, or if the long-term-care coverage is otherwise canceled. HUD says it is considering requiring that the loan be repaid within 90 days in such cases unless a new policy is purchased or the waived premium paid. Servicers may be required to ensure that the long-term-care premiums get paid, the department says.
In its notice, HUD asked for suggestions on how to increase the utility of packaging, and what responsibilities the lender should have when it comes to determining which policies should qualify for the premium waiver. HUD is also working with the Department of Health and Human Services on issues related to long-term-care insurance.
James Mahoney, the chief executive of Financial Freedom Senior Funding Corp., said the “bigger story” has to do with encouraging the use of reverse mortgages to fund long-term care.
Packaging reverse loans with long-term-care insurance may have some appeal by itself, but growing interest in helping seniors stay in their homes by using home equity instead of government dollars to fund long-term care could produce “a home run here for everybody,” he said. (IndyMac Bancorp Inc. bought his Irvine, Calif., lender from Lehman Brothers in July.)
The National Council for the Aging is developing a blueprint for encouraging the use of reverse mortgages to fund long-term care as part of its “Use Your Home to Stay at Home” initiative. The project was commissioned last year by the Department of Health and Human Services’ Centers for Medicare and Medicaid and the Robert Wood Johnson Foundation.
Barbara Stucki, the manager of the council’s project, said linking reverse mortgages to long-term-care insurance is “not the ideal point of where we want to be, but it is certainly a starting point.”
