Reverse Mortgage Loan Blog

In the wake of Finra’s strong warning to investors last week about the dangers of reverse mortgages, advisers are wondering whether the Financial Industry Regulatory Authority Inc. has more up its sleeve.

The New York- and Washington-based regulator of the securities industry urged older homeowners to weigh all their options carefully before tapping their home equity, noting that reverse mortgages can “jeopardize” retirement security.

The regulator’s investor alert, titled, “Reverse Mortgages: Avoiding a Reversal of Fortune,” warns investors to be aware of financial professionals who recommend reverse mortgages “in order to fund a particular investment.”

“We believe these [reverse mortgages] are being promoted more and more to investment professionals, and investors need to understand what they’re purchasing,” said John Gannon, Finra’s senior vice president for investor education in Washington.

But in issuing its alert, Finra may have had more on its mind than educating investors, some speculated.

Finra’s warning is “clearly a response” to an article, “Tapping into homes can be pitfall for the elderly,” published in The New York Times on March 2, said Peter Bell, president of the National Reverse Mortgage Lenders Association in Washington.

“The article left the perception that the sale of a reverse mortgage followed by [the sale of] an annuity is standard operating procedure when, in fact, it is the exception and not the norm,” he added.

While he declined to elaborate, Mr. Gannon said Finra jumped on the reverse mortgage issue at this time for a variety of reasons.

“The New York Times article was not the cause,” he said. “We’ve been working on this for two months.”

Two financial advisers had their own presumptions about the timing of the Finra alert.

“Given their window on the activities of stockbrokers, if Finra is saying this, then it’s shocking because it means there must be a lot of [investors] being taken advantage of,” said Christopher Cordaro, chief investment officer of Chatham, N.J.-based RegentAtlantic Capital LLC, which manages $1.8 billion.

Indeed, considering its position, Finra’s warning should be heeded closely, said Frederick E. Adkins III, chief executive of The (Little Rock) Arkansas Financial Group Inc., which manages $200 million.

“They’re probably doing it on a preemptive basis,” he said. “I think they’re going to be hearing some arbitration cases” related to brokers’ selling reverse mortgages to fund high-commission financial products.

This presumption isn’t necessarily true, said Finra’s Mr. Gannon.

“It’s not always the case that when we run an investor alert, we’re going to do something,” he said. “Sometimes [alerts are published] with an enforcement action and other times when something comes up on our radar screen.”

Unfortunately, the warning runs the risk of doing as much harm as good, noted Mr. Cordaro.

“The warning is appropriate, but I hope it doesn’t sour the market for reverse mortgages or seniors’ perceptions of reverse mortgages; under the right circumstances, they’re a lifesaver,” he said.

“It’s like nitroglycerin; it’s not good for you, but it can save your life if you have a heart attack,” he added.

When approaching reverse mortgages, investors should err on the side of caution, said Mr. Adkins, who served as chairman of the board of governors of the Certified Financial Planner Board of Standards Inc. of Washington.

“It’s an invitation to mischief from a behavioral standpoint,” he said. “[Brokers] are saying, ‘Here’s a great way to raise cash to generate commissions.’”

Indeed, the possibility that investors would raise cash with a reverse mortgage to fund the purchase of an annuity has long been a concern of the reverse-mortgage industry, Mr. Bell said.

“Ninety-eight percent of our members have nothing to do with annuities, and many are vehemently against them,” he said.

Financial Freedom Senior Funding Corp., the nation’s largest reverse-mortgage company, counts itself among the banks that vehemently oppose annuities, said Michelle Minier, chief executive of the Irvine, Calif.-based company. Financial Freedom originated about 50% of all reverse mortgages in 2007.

“We applaud any effort that seeks to educate and protect seniors,” she said.

Wells Fargo & Co. of San Francisco, the biggest seller of reverse mortgages under its own brand name, declined to respond to a phone call related to the Finra alert.

The Financial Planning Association of Denver declined to comment on the alert, because it has not established a position on reverse mortgages, said its spokeswoman, Heather Almand.

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