The CFPB is Wrong about Reverse Mortgages

In the first edition of my book, Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement, I did not analyze using a reverse mortgage to support the short-term costs of delaying Social Security. But a faulty report issued by the Consumer Financial Protection Bureau (CFPB) in August 2017 claimed that using a reverse mortgage to delay Social Security is a bad idea. This report gained a lot of press coverage and is likely serving as the primary resource for people seeking to learn more about the matter. I will provide the analysis that shows why the CFPB is wrong about reverse mortgages and Social Security.

I am not philosophically opposed to the CFPB’s mandate or the regulations it has advocated. I believe in effective regulation, and have served as an intern at the Social Security Administration. My original career goal, before finding my place in academics, was to become a U.S. government economist.

But I am disappointed that this report was issued and heralded with a press release and other promotion by the CFPB.

There is a sentence in the conclusion of the report that makes sense, “For consumers who have the option, working past age sixty-two is usually a less costly way to increase their monthly Social Security benefit than borrowing from a reverse mortgage.” This is true. Delaying retirement is usually the best possible way to build stronger finances for retirement. But for those who have retired at sixty-two, what is the best way to coordinate Social Security claiming, home equity, and the investment portfolio to build an efficient overall retirement income plan?

The report failed to answer this adequately; its conclusion that the reverse mortgage is too costly was incomplete.

What the report does is to estimate the increase in total Social Security benefits (ignoring cost-of-living adjustments) obtained (assuming a life expectancy at 85) by waiting from age 62 to age 67 before claiming Social Security benefits. Technically, this is not a delay of Social Security, but just claiming at the article’s assumed full retirement age rather than claiming early. The additional benefits are compared to the costs of replacing those five years of missing age-62 benefits by taking distributions from a HECM line of credit. Reverse-mortgage costs are reflected through the upfront fees, insurance premiums, servicing costs and interest accumulated at the age-85 life expectancy. These costs are shown to be substantially higher than the net gain in Social Security benefits, leading the authors to conclude:

We find that borrowing a reverse mortgage loan to get an increased Social Security benefit carries significant costs that generally exceed the additional lifetime amount gained from delaying Social Security. In addition, the amount that a consumer will need to borrow from a reverse mortgage loan to delay claiming Social Security benefits could negatively affect the consumer’s ability to move or use their home equity to meet a large expense later in life.

These conclusions violate two of the tenets of my Retirement Researcher Manifesto. Tenet one is to play the long game. Do not base your decisions about what happens at life expectancy, but rather what happens if we live well beyond life expectancy. Delaying Social Security is a form of insurance that supports the increasing costs associated with living a long life. It provides inflation-adjusted lifetime benefits for a retiree and a surviving spouse, and these lifetime benefits will be 76% larger in inflation-adjusted terms for those who claim at 70 instead of at 62. The value of this insurance is missed when analysis only considers the impacts through life expectancy.