Reverse Mortgagers See Rising Need, Old Fears

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NEW YORK (TheStreet) -- As retirees' scramble to ensure they don't outlive their savings leads many to consider reverse mortgages, sellers of those products continue to scrub away at their lingering taint of controversy and criticism.

The needs of the so-called "sandwich generation" are driving increased awareness and use of reverse mortgages, says Jeffrey Lewis, a senior managing director at Guggenheim Partners in New York and chairman of the board of Generation Mortgage, the largest privately owned reverse mortgage retailer and wholesaler in the United States and among the top five providers in the nation.

In a recent survey of baby boomers who are financially supporting aging parents and children at the same time, 78% of respondents fear that they will not be able to retire "comfortably" and 52% said they would need to work part time during retirement. Sixty-one percent described their parents' financial situation as "negative" -- the same description 64% applied to themselves.

The survey underscores the difficulty faced by children supporting parents whose savings are falling short of the mark.

"If the children don't have their own financial house in order, that just created more financial and psychological stress within the family," Lewis says.

Lewis is clearly agitated when he addresses complaints some consumer groups have with reverse mortgages, including claims that they are not a cost-effective alternative and that sales tactics can offer seniors a bad deal. There is, and always have been, federally backed guarantees, he says, dismissing one recent, critical piece by a consumer-focused organization as "absurd" and sounding like a "report written by a seventh-grader using an encyclopedia."

He asks: Is credit card debt with double-digit interest rates a better alternative? And he balks at suggested alternatives that boil down to cashing in liquid assets or borrowing from other sources, including family members.

"Fifteen years ago, it was very common for the children to be objectors. They had this view we know, 'Mom's house is paid for or mostly paid for,' so that's something they can split up somewhere down the road," Lewis says. "Now, in a lot of ways, we think the kids are the customer base for this product. The reduction in the financial stress on the kids that is accomplished by having the parents use their own money is tremendous. To the extent that a reverse mortgage makes it possible for parents to handle their own finances, at least for a period of time, is a major win for the kids."

Lewis says the hand-in-hand combination of the recession and real estate market bubble burst was rough on the industry and its potential customers.

"There is no doubt that a lot of people who wanted reverse mortgages could not get them because of values," he says. "If the home value is down $20,000 to $50,000 from what they expected it to be or, more importantly, what they needed it to be to get enough proceeds to pay other debts, in many cases a reverse mortgage did not work out for them. Now that we have some stabilization of the home values, even if there is not a lot of appreciation yet, it will be useful, because people will have a much more realistic sense of what their home is worth. A lot of people were disappointed when they applied, got their appraisal back and there just wasn't the value that they needed."

For the most part, Lewis says he and most in his industry welcome increased federal oversight and regulations such as those included in the Dodd-Frank Act.

"The fact is that the industry has been heavily monitored and we've welcomed all that oversight," he says. "We all know, and take very seriously, the responsibility we have when our customer base is only seniors and primarily seniors in some sort of financial distress. We understand there is a lot of oversight that is going to go along with that."

He questions, however, efforts to reign in cross-selling that have led to a growing retreat from the product by many advisers and brokers. A complaint long waged by consumer advocates is that providers have bundled unnecessary financial products with reverse mortgages.

"For most Americans, their home is the biggest part of their net worth," he says. "We are so afraid of somebody buying the wrong thing because it was bundled with their reverse mortgage that we are preventing there from being any comprehensive discussion of seniors' finances. By building walls around these products, I think we are creating more danger than safety. Nobody wants to see people taken advantage of, but the place where the first and second line of defense for making sure that doesn't happen should be in the compliance departments of these other industries."

Insurance companies top his list of those who should get a similar level of scrutiny.

"If someone is 90 years old and they buy a deferred annuity with 13 points of sales charges and 10 years of surrender charges, that's probably not an appropriate product for that person," he says. "I don't know how this became our problem. The insurance industry actually avoided a big increase in regulation in the financial services reform bill. Annuities that have equity-like characteristics were going to be characterized as investment products and the people who sold them were going to have to be registered -- as people who sell investment products are. But somehow, the insurance industry wiggled off the line on that one. They have Teflon and we have flypaper."

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