Since annuities provide the only way in which retirees can share mortality risk with others in the same age bracket, they should be in nearly every senior’s retirement plan. The fact that they are not speaks to the chaos of the private retirement system in the United States, and the Department of Housing and Urban Development (HUD)’s hostility toward the combination of an annuity with a reverse mortgage contributes to this chaos.
This is the perspective shared by Jack Guttentag, aka “the Mortgage Professor,” in a new column at Forbes.
“Retirees who could profit from an annuity but don’t […] suffer lower spendable funds over their life spans,” Guttentag writes. “The loss is particularly large among homeowners with limited or no financial assets. These are the ‘cash-poor-house-rich’ retirees, who comprise a large proportion of all retirees.”
For a retiree in their early 60s with no assets but a house worth $700,000, there are two options available under the Home Equity Conversion Mortgage (HECM) program. The first is more commonly used, and that is a tenure payment which provides a regular monthly payment for as long as the retiree lives in the home, Guttentag writes.
“The alternative, which is substantially better but little used, is to draw a credit line, part of which is used to purchase a deferred annuity while the remainder is used to provide spendable funds during the deferment period,” he says.
This is complicated by “highly imperfect” market structures for both HECMs and annuities, since prices on the same transaction can vary wildly. Additionally, HUD tends to look down on the combination of an annuity with a HECM line of credit.
“HUD is hostile to the practice of combining reverse mortgages with annuities,” he says.
HUD is unable to tell a borrower what they can or cannot do with a HECM loan’s proceeds, but instructs counselors who determine a client’s readiness for the loan’s responsibilities to determine if the client is considering using the loan proceeds to buy an annuity; and to inform the client that there are ways to obtain an annuity without HECM proceeds, Guttentag says.
Counselors must also discuss the costs and implications of using the proceeds to buy an annuity; and finally to explain that, in some cases, fixed monthly advances from an annuity may be smaller than fixed monthly advances of HECM proceeds, he adds.
“The last point is flat-out wrong,” Guttentag says. “A corrected statement, based on the evidence provided earlier, would be that fixed monthly annuity advances funded by HECM credit lines will almost always be larger than fixed monthly loan advances from a stand-alone reverse mortgage. The reason is that the first option involves mortality risk-sharing while the second does not.”
Read the column at Forbes.
