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From: PJ Wade [mailto:pjwade@thecatalyst.com]
Sent: April 6, 2009 3:02 PM
To: Liepins, Aina
Subject: Response to Draft Advisory Capital Treatment of Reverse Mortgages -- by PJ Wade The Catalyst

 

April 6, 2009

To    Aina Liepins
        Office of the Superintendent of Financial Institutions

From    PJ Wade
             The Catalyst                           

Please accept this email as my formal response to The Office of the Superintendent of Financial Institutions (OSFI) request for questions and comments regarding the Draft Advisory Capital Treatment of Reverse Mortgages, dated March 10, 2009.

Based on Statistics Canada and industry projections, the Canadian Reverse Mortgage Market is expected to grow to more than $40 billion by 2030. Since home ownership levels are very high in Canada, large numbers of consumers will be affected in many ways, directly and indirectly, by this growth in the Reverse Mortgage Industry. Before growth escalates dramatically, there is an opportunity to begin and to maintain this industry on solid pro-consumer ground, not evident in the mortgage, banking or real estate industries.

The Reverse Mortgage Industry should not be considered merely an arm of the traditional mortgage industry, but a stand-alone multi-faceted entity. The traditional mortgage industry initially arose to enable consumer debt where property buyers pay for the privilege of using someone else’s money to purchase real estate. Through a reverse mortgage, a property owner arranges a fully-secured advance on their existing equity which it has taken years, if not a lifetime, to accumulate. This equity spending involves an entirely different set of consumer criteria, choices and decisions, including wealth management and lifestyle decisions which are not easily reversed if errors and bad judgment are later discovered.

Since reverse mortgages first appeared in Canada, I have followed the organizations, analyzed products, interviewed advisors and researched consumer response. To preserve my status as an independent researcher, strategist and journalist, I have chosen not to sell reverse mortgages or to receive commission from a reverse mortgage lender.

The results of my initial work, including research through the Canada Mortgage and Housing Corporation, were first published early in the 1990s. This led to a comprehensive report which was published in 1994 by John Wiley & Sons as the 306-page perennial favourite, Have Your Home and Money Too: The Canadian Guide to Reverse Mortgages, Home Equity Conversion, and Other Creative Housing Options. The updated Second Edition of Have Your Home and Money Too, expanded to include Home Equity Management, was published by Wiley in 1999. My latest book on the subject, Reverse Mortgages: Best Friend, Worst Enemy...Your Choice!, was published in September 2008 by Catapult Publishing, in both print and Ebook formats.

Throughout this time, I have spoken on home equity management and written numerous articles on reverse mortgages for publications, including The Globe and Mail and The Financial Post, and websites, including Quicken.ca and Realtytimes.com. I have been interviewed by many journalists, across the full spectrum of media, and have appeared on television and radio speaking on the subject to help consumers make informed decisions. My three-fold goal has always been, simultaneously, to:
•    Encourage professionals and advisors to ensure they are fully informed on the subject whether they are personally pro or con home equity conversion
•    Inspire potential lenders and product developers to create new products and variations to achieve an open competitive marketplace, and
•    Encourage consumers to become as knowledgeable as possible on the subject, so their choice to sign up for, or to avoid, a reverse mortgage is a fully-informed one.

My work has always emphasized that: “These financial, lifestyle, and wealth management tools are not ‘good’ or ‘bad’ in themselves. A reverse mortgage may be the best or the worst solution to a problem, or response to an opportunity, depending on how and when it is used:
    •    Best Friend: When a reverse mortgage is the best solution, it will also be the only solution completely acceptable to the homeowner. This makes a reverse mortgage a ‘best friend’ since nothing else will allow the homeowner to achieve that specific set of financial and lifestyle goals, one of which is to keep the property and release equity at the same time.
    •    Worst Enemy: When a reverse mortgage is the wrong fit, there will be at least one solution, if not more, that would suit the homeowner’s needs more completely or less expensively. This makes the reverse mortgage a ‘worst enemy’ since it will erode or erase the accumulated home equity that probably took decades of mortgage repayment and real estate appreciation to create.”
 
For your information, additional excerpts from my current book, Reverse Mortgages (ISBN 9781894189019), are attached to outline the potential product range and issues related to my questions below. On March 16, 2009, a 21-page preview of the Ebook was sent to OSFI. Please respect copyright in both cases. (Queries may be directed to me at pjwade@TheCatalyst.com or to the publisher at priority@CatapultPublishing.com)

   1. Table of Contents  pages I - IV
   2. Chapter 3: Variations on a Theme  pages 30-48
   3. Chapter 5: Starting Smart (14 pages) excerpt pages 67-69
   4. Chapter 7: What Am I Signing? (28 pages) excerpt pages 102-103

OSFI decisions are not isolated from the issues central to an industry’s development, but must be integrated into every facet and element to ensure equal advancement of the interests of industry members and the public.

The key questions are as follows:
1. In which ways could the OSFI definition of reverse mortgages and the capital treatment criteria set by OSFI for reverse mortgages discourage or limit the development of a full range of reverse mortgage products and an open competitive marketplace in the years ahead? Would this definition permit a reverse mortgage line of credit with a voluntary regular or periodic repayment feature for consumers who want to minimize the effect of compounding interest?

2. The application for bank status by the national reverse mortgage lender, Canadian Home Income Plan Corporation, has triggered this OSFI advisory. Will the advisory, and any related standards set or decisions made by OSFI, give an unfair advantage to or further entrench the national monopoly of this reverse mortgage lender over organizations, from a variety of backgrounds, that apply for lender status in the future?

3. How will new OSFI standards allow and encourage lenders to offer equal access to reverse mortgages by property owners across Canada, including those in low-value homes, rural areas, isolated locations and uniquely constructed homes like those with environmental-sustainable designs?

4. How will the decisions of OSFI regarding reverse mortgages influence or determine government policy, standards or legislation regarding other aspects of reverse mortgage/home equity conversion lending, at federal and provincial levels?

5. The current credit crisis is a startling example of the range of unfavourable, life-damaging outcomes that can arise when governments and institutions do not think beyond the criteria and interests of decision-makers and the individuals in control, nor pro-actively lead development of emerging financial sectors in consumer-favourable directions. Which measures are being taken to ensure there are no unfavourable “later unforeseen” ramifications to the decisions made in or affected by this advisory?

6. Recently, a National Post article reported Manulife’s credit downgrade, noting that in 2008, OSFI “relaxed the rules about how much money insurers must set aside to support segregated funds.” Segregated funds are a familiar and well-understood product, and yet OSFI projections proved inadequate. Reverse mortgages are very country specific for many legal, real estate and marketplace issues, and, although they have been available in Canada since the late 1980s, there has not been an open competitive marketplace to expose product design and variation to economic shifts. That said, how has OSFI made projections to ensure their decisions carry long-term validity? What are those projections? Which measures or policies ensure this is pro-active not reactive management of the Reverse Mortgage Industry?

I look forward to answers to these questions and concerns which are based on my sincere and long-term interest in the development of an open competitive Reverse Mortgage Marketplace in Canada.

Thank you, in advance, for including these key considerations and issues in the OSFI advisory.

Regards,

PJ Wade

Attached: Excerpts from Reverse Mortgages: Best Friend, Worst Enemy...Your Choice! (© 2008 PJ Wade, The Catalyst; CatapultPublishing.com)