The Mortgage Professor debunks 4 HECM myths

“When you drive, you have no control over the maniacs on the road, but when you take a reverse mortgage you are fully in charge of all the risks.”

So wrote Jack Guttentag, a.k.a. The Mortgage Professor, in an article published in Forbes over the weekend, which took issue with the assertion that reverse mortgages are “unduly risky.”

The piece took specific aim at a recent story published in the Philadelphia Inquirer that reiterated common misconceptions about these loans.

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Guttentag is a professor of finance emeritus at the Wharton School of the University of Pennsylvania. He worked previously as the chief of the domestic research division of the Federal Reserve Bank of New York.

Now, he runs a website as The Mortgage Professor, offering consumers guidance on traditional and reverse mortgage loans. Using his tools, calculators and encyclopedia of information, you can “explore your options with the Professor on your side.” 

He told HousingWire that public misconceptions about reverse mortgages are a result of uninformed news coverage.

“The public acquires the misconceptions of the media people who write about reverse mortgages without thoroughly understanding them,” he said, adding that he believes reverse mortgages will “without a doubt” become more common place as Baby Boomers age.

And that’s why he believes it’s important to address these myths.

“A retirement funds crisis is emerging, and HECM reverse mortgages can help contain it,” he said.

In the Forbes article, Guttentag lined up four reverse mortgage myths and shot them down, one by one.

Here’s a recap:

Myth #1: Reverse mortgages have hidden risks that can cost you your home.

To get a reverse mortgage, a borrower must pay their property taxes and homeowner’s insurance and keep the property in good repair. Failure to meet these obligations can possibly lead to foreclosure.

As Guttentag points out, these obligations are hardly hidden. Not only do reverse borrowers have to slog through a mountain of paperwork that repeatedly outlines their obligations, but they must also undergo HECM counseling with an independent, certified credit counselor.

“In sum, I view driving a car as a lot riskier than taking a reverse mortgage,” Guttentag wrote. “When you drive, you have no control over the maniacs on the road, but when you take a reverse mortgage you are fully in charge of all the risks.”  

Myth #2: Deceptive TV advertising hides hidden risks.

Reverse mortgage lenders use advertisements to tout the benefits of their product – just like every other advertiser, Guttentag pointed out.

“In that regard, reverse mortgage ads are no better or worse than automobile ads,” he added.

Guttentag said astute consumers should know not to base decisions based on ads alone, but to do their research to make a sound financial choice.  

Myth #3: Predatory marketing tactics target minorities and low-income homeowners.

For the professor, this one is simple: “There is no evidence that reverse mortgage lenders engage in predatory behavior, no matter how that term is defined.”

Guttentag said many HECM borrowers are in some sort of financial distress, and that he thinks people are turned off by marketing efforts that target this segment.

To shed this bad rap, he said, reverse lenders will need to expand their reach to those who are more financially savvy.

“The viability of the HECM program over the long run depends on whether it can attract more borrowers who can get along without it but can significantly improve their lifestyle with it,” he wrote.  

Myth #4: Reverse mortgages nullify inter-generational wealth transfers.

Finally, Guttentag said that some detractors of the program assert that reverse mortgages reduce equity, thereby reducing the value of the estate for the homeowner’s heirs.

“That is not a weakness of the program, it is by design,” Guttentag pointed out. “The presumption is that the homeowner can make better use of the equity than his heirs.”

But if that’s not for you – if you prefer not to make use of your hard-earned equity in order to leave your house free and clear to your children – the professor has simple advice: “Don’t take out a HECM.”