Annuities To Reverse Mortgage Borrowers Out Under FHA Reform

by Peter G. Miller
July 28th, 2008

The final version of H.R. 3221: The Housing and Economic Recovery Act of 2008, has some real teeth when it comes to selling annuities and other insurance products to reverse mortgage borrowers.

Buried in the 636-page bill is the language below. In basic terms, it says that mortgage lenders are welcome to sell reverse mortgages but they cannot be paid for the sale of insurance products or annuities.

Some seniors have obtained reverse mortgages for the purpose of buying annuities from the same folks who sold them the reverse mortgage — only to discover that the rate of return on the annuity is less than the cost of the reverse mortgage and to also discover that the annuity has a huge prepayment penalty.

This is one the Congress got right. In particular, congratulations and a thank you to Sen. Claire McCaskill (D-MO. She led the effort to block annuity sales to seniors who want reverse mortgages, and in doing so she has helped homeowners nationwide. You can imagine that there are a bunch of people in the insurance industry who are fairly peeved with Sen. McCaskill for having the gall to seek fairness for seniors.

Language from the final FHA bill is below:

(n) Requirements on Mortgage Originators-

(1) IN GENERAL- The mortgagee and any other party that participates in the origination of a mortgage to be insured under this section shall–

(A) not participate in, be associated with, or employ any party that participates in or is associated with any other financial or insurance activity; or

(B) demonstrate to the Secretary that the mortgagee or other party maintains, or will maintain, firewalls and other safeguards designed to ensure that–

(i) individuals participating in the origination of the mortgage shall have no involvement with, or incentive to provide the mortgagor with, any other financial or insurance product; and

(ii) the mortgagor shall not be required, directly or indirectly, as a condition of obtaining a mortgage under this section, to purchase any other financial or insurance product.

(2) APPROVAL OF OTHER PARTIES- All parties that participate in the origination of a mortgage to be insured under this section shall be approved by the Secretary.

(o) Prohibition Against Requirements To Purchase Additional Products- The mortgagee or any other party shall not be required by the mortgagor or any other party to purchase an insurance, annuity, or other additional product as a requirement or condition of eligibility for insurance under subsection (c).



(a) In General- Section 255 of the National Housing Act (12 U.S.C. 1715z-20) is amended–(1) in subsection (b)(2), insert `real estate,’ after `mortgagor’,';

(2) by amending subsection (d)(1) to read as follows:

(1) have been originated by a mortgagee approved by the Secretary;’;

(3) by amending subsection (d)(2)(B) to read as follows:

(B) has received adequate counseling, as provided in subsection (f), by an independent third party that is not, either directly or indirectly, associated with or compensated by a party involved in–

(i) originating or servicing the mortgage;

(ii) funding the loan underlying the mortgage; or

(iii) the sale of annuities, investments, long-term care insurance, or any other type of financial or insurance product;

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9 Responses to “Annuities To Reverse Mortgage Borrowers Out Under FHA Reform”

  1. John Yedinak Says:


    I was under the impression this was removed from the Bill? When you check out the text it has been crossed out… let me know if I am missing something.


  2. ReverseMan Says:

    Our lawmakers are the master of “the law of unintended consequences”. The language of this bill if accurate would force out all insurance licensed professionals from the reverse mortgage industry regardless if their insurance activities are completely separate.

    Those with previous and current professional licenses from the financial services industry actually bring valuable knowledge to the reverse space in retirement planning, financial fact-finding and many other areas.

    It looks like yet another case of throwing out the baby with the bath water.

  3. Peter G. Miller Says:

    John –

    Thanks for your note.

    The last version of the bill, as posted by THOMAS, is H.R.3221.EAS2, the “Housing and Economic Recovery Act of 2008 (the “Engrossed Amendment as Agreed to by Senate.” This is what is on the public record.

    Is there a later version of the legislation?


  4. Peter G. Miller Says:

    >>>who would you rather go to for a reverse mortgageā€¦the mortgage broker who can no longer sell in the sub-prime space and came to the RM side for a paycheck, or the financial advisor that you have known and trusted for years?

    If they are asking me to fund an annuity with the proceeds from a reverse mortgage or trying to sell a subprime loan I would not want either of them.

    Happily, there are more and better choices out there.

  5. Bill Peters Says:

    No, Peter, they didn’t get this one right.

    I’m very much opposed to the guys who sell deferred annuities with reverse mortgage proceeeds, but the broadly prohibitive language in the bill does not distinguish between deferred annuities, immediate annuities which can rarely but occasionally provide higher incomes than the reverse mortgage payments, life insurance to protect a spouse, estate, or increase a legacy, and even long-term care insurance. It could also prohibit a good insurance agent from using a medicare Advantage plan to save the borrowers hundrdeds of dollars each month versus a Medicare Supplement health plan. Most securities broker-dealers already prohibit using home equity to fund market-based investments.

    I mention long-term care because the same legislation resurrects and implements the Clinton-era law stating that FHA mortgage insurance premiums will be refunded to those that use reverse miortgage premiums to purchase long-term care insurance.

    We can stop the “get a reverse mortgage so you can buy this annuity” guys with much narrower language. The current language just imagines that professionals all operate in distinctly regulated “silos” – they don’t, and customers benefit from pros with multiple licenses who can talk about the pros and cons of a broader range of ideas and products. These are the guys who are in business to first find out what the client wants to do, and then figure out the best way to do it. The norm, and the regulatory assumptions, in the financial industry is the other way around.

  6. Peter G. Miller Says:

    Bill –

    Thanks for your note.

    You make a good point, I suspect the trouble is in how to draw that bright line between what is allowed and what is not.

    One of the by-products of abuse is over-reaaction. That’s not fair to the people who act honorably, but it seems like a common result.

  7. Trevon Kanavy Says:

    An annuity is the only prodect that provides income to a senior for as long as he or she shall live, reqardless of home ownership, equity, or condition.

  8. Peter G. Miller Says:

    Yes — and the fees and charges are how much? And the prepayment penalty is how big?

  9. Reverse Mortgages & The Puzzle of Annuities | Reverse Mortgage Guide Says:

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