Reverse Mortgages & The Puzzle of Annuities

It’s now being reported that the final version of Wall Street reform will exclude long-sought protections for annuity abuses, the financial contracts widely sold to seniors.

In 2008, Congress moved to protect reverse mortgage borrowers by prohibiting the sale of annuity contracts and other financial products by those who also sell reverse mortgages. The idea was to stop the sale of financial two-fers: First, seniors are sold a reverse mortgage and then an annuity funded with the money obtained from the reverse loan. For this combination to work, the annuity would have to pay substantially more than the interest cost and fees associated with the reverse mortgage. Unfortunately, most annuities do not offer such yields but they do inflict heavy penalties for those who make premature withdrawals and they do generate lots of fees and commissions.

Federal Regulation

One idea under Wall Street reform has been to finally regulate annuities at the federal level. This would mean that annuity buyers in all states would have the same level of consumer protection. Instead, Congress went in the other direction.

Claudia Deutsch, a long-time reporter for the New York Times, says with regard to annuities that “lots of people invest in those because, even though they don’t pay big, they seem pretty safe. But they involve huge penalties for early withdrawal of money, so they really aren’t a great idea for elderly folks. Yet old folks make up a huge proportion of annuity holders, probably because talented snakeoil salesmen persuaded them to buy.

“The new bill deems annuities to be insurance products, and thus not subject to SEC regulation. That has some consumer advocates crying foul.”

Kevin Liptak with the Huffington Post Investigative Fund says “companies offering annuities successfully lobbied against further regulation, allowing them to continue offering products that are marketed to senior citizens, sometimes deceptively. The final bill exempts the products from SEC regulation, and instead treats them as insurance products that are regulated at the state level. Democrats who supported the exemption said they believed state regulators were better equipped to regulate the products, but opponents argue the measure will leave seniors exposed to further predation by the industry. The Hill found companies that offer annuities lobbying heavily in favor of the exemption.”

State Insurance Commissions

I get that borrower and consumer advocates would like to have a single set of rules for annuities, that every borrower would then have the protection of the same rules and regulations. I think they’re right.

That said, take a careful look a private mortgage insurance. It’s regulated by state insurance commissions and the regulation is generally regarded as excellent in the sense of reserve requirements. As well, private mortgage insurance companies generally — but not always — stayed away from toxic mortgage loans. In fact, so-called piggy-back loans were set up specifically to avoid private mortgage insurance and their regulators.

So yes, national rules for annuities would have been good for seniors and all other human beings. But Washington is Washington and seniors are lucky that the rules were not made even worse.

This entry was posted on Wednesday, June 30th, 2010 at 12:28 am and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.