Reverse Mortgages — “more than a niche product”?

Editor’s Note: In order to be “perfectly clear”, we at the “Gofinancial” website choose to be hesitant to accept one more expert review of the Reverse Mortgage. We think it continues to cloud the issues inherent in describing the future of a widow taking care of her mother and running out of money as she sits with a house over her head that needs repairs and a budget shrinking in the background. We’ve stood with these people to work out a HECM mortgage that fixes her problem. We didn’t take much time evaluating everybody else and care little for another “mismatched” agreement of experts that just mixes the pot and creates a guilty conscience for those who choose a Reverse Mortgage over some other approach.

We work hard to be experts while we please people in a financial bind, but we reach over to the somewhat forbidden area that suggests you own the equity in your home and can use it as you please without payments in your lifetime.

If that sounds too good, then you probably aren’t interested in a HECM reverse mortgage.. For those wishing to debate with the experts, you can access the latest from Brookings institute and enjoy the ride. Here it is for your review: We have provided the “introduction” to help evaluate your interest in the study.

https://www.brookings.edu/wp-content/uploads/2019/10/ES_20191024_BailyHarrisWang-1.pdf

The state of the (HECM) marketplace

The evolution of American retirement has necessitated more seniors entering their post-working lives to take a more active role in retirement planning. This often leads to recent retirees lacking a sufficient amount of savings, while also having access to potentially substantial equity built up in their homes. Such an arrangement makes a reverse mortgage an appealing option for some seniors who are looking for sources of retirement funding, though some notable impediments exist that have kept the number of reverse mortgage borrowers generally low, the researchers say.

“In theory, reverse mortgages should be more than a niche product,” the paper reads. “Many older households are rich in home equity, but poor in financial assets—suggesting that accessing housing wealth could materially improve their standard of living. And reverse mortgages are consistent with economic theory dictating that households should accumulate wealth during their working years and spend down that wealth in retirement—with reverse mortgages being the only plausible way to access home equity without a regular payment and while continuing to live in the home.”

However, less than 1% of eligible homeowners avail themselves of a reverse mortgage, which researchers attribute on the demand side to barriers like high upfront fees, and borrower caution related to product complexity and the risk of foreclosure. On the supply side, there is risk in a reverse mortgage transaction for issuers due to the possibility of a borrower failing to meet tax and insurance requirements, as well as risk to the Mutual Mortgage Insurance Fund (MMIF) for the scenarios when the amount owed crosses over the threshold of a home that may have lost value.

‘Great potential’ for secure retirement

For the researchers who authored the overview paper, the reverse mortgage product and marketplace is not totally new territory but brings with it a surprising level of complexity. Still, reverse mortgages do contain a great deal of potential for retirees and should be more carefully considered, according to paper author Martin Baily, the Bernard L. Schwartz chair in economic policy development and a senior fellow in economic studies at the Brookings Institution. However, that doesn’t mean that they will necessarily catch on with retirees.

“Prior to writing the paper, I thought there was a great potential for the elderly to use this instrument to provide themselves with a more secure retirement,” Baily tells RMD. “Based on the research I still think that reverse mortgages are a useful vehicle for some households, and that improvements to the market (notably those suggested by our paper givers) could help expand the market.”

One of the reasons that the products may not end up catching fire with retirees is because of the levels of home equity remaining after some of the loan obligations are met, Baily says.

“After accounting for future property taxes, insurance and maintenance, there is often less home equity available than people had thought,” he says. However, that does not mean that people should necessarily be discouraged from examining reverse mortgages as a viable solution in retirement, at least for some people.

“This can become a reputable and valuable instrument for some, but it is not the choice for everyone,” Baily said when asked what a primary takeaway should be from the Brookings research.

The widespread lack of adequate preparation for retirement has prompted a search for more and better ways to help Americans achieve a secure retirement. Much of this effort has been focused on helping working-age households both increase their saving and improve their investment strategies (the “accumulation phase”), but more recently efforts have aimed to help retirement-age households better manage risk and increase their retirement income for a given level of assets (the “decumulation phase”).

Reverse mortgages are one such strategy. In simple terms, reverse mortgages are consumer loans that are taken out against the value of a home. Unlike home equity loans, reverse mortgage loans are only repaid when the home is no longer owned by the homeowner (typically through sale or death), and the maximum amount a borrower has to pay is capped by the value of the equity in the home.

Combined, these two characteristics make the product uniquely suitable for retirement-age households. In theory, reverse mortgages should be more than a niche product. Many older households are rich in home equity, but poor in financial assets—suggesting that accessing housing wealth could materially improve their standard of living.

And reverse mortgages are consistent with economic theory dictating that households should accumulate wealth during their working years and spend down that wealth in retirement—with reverse mortgages being the only plausible way to access home equity without a regular payment and while continuing to live in the home.

Despite this theoretical appeal, reverse mortgages have yet to catch on—with less than 1 percent of eligible homeowners taking up the product. Several factors drive the low take-up rate. On the demand side, reverse mortgages can carry high fees—especially to access the first dollar in borrowing. Some borrowers may be put off by the loans’ complexity and warnings about the risks of foreclosure.

Also, it appears that many retirees regard their home equity as insurance against unexpected costs (especially health care costs) or as a store of wealth to be given to heirs, rather than as a source of retirement income. On the supply side, reverse mortgages carry moderate risk for issuers, who offer loans under the condition that homeowners pay insurance and property tax costs, while also maintaining the home; failure to meet these obligations can results in losses for banks. And the federal government, which serves as the backstop against losses due to falling home prices (or extended longevity), has recently instituted reforms designed to protect against losses—but that may make the program less appealing to consumers.

Two papers by Davidoff (2019) and Moulton and Haurin (2019), released simultaneously with this document, present helpful reform proposals (described below) to stimulate and ECONOMIC STUDIES AT BROOKINGS 6 /// The Unfulfilled Promise of Reverse Mortgages: Can a Better Market Improve Retirement Security? improve the market for reverse mortgages.

This paper aims to serve as a companion framing paper to those policy proposals, laying out the current state of the reverse market, a summary of the economic literature, and the economic arguments around reverse mortgages—including how potential reforms can expand and improve the market. Our summary conclusion is that the market shows theoretical appeal, but a host of real-world barriers make these products untenable for most retirement-age households. A series of reforms, such as those presented by Davidoff and Moulton and Haurin, could expand the market considerably—although we are skeptical that reverse mortgages will become commonplace in the American retirement landscape.

Overview of the reverse mortgage market

A reverse mortgage is a mortgage loan that allows a homeowner to access home equity while keeping the property as the primary residence.

The biggest difference between a reverse mortgage and a traditional mortgage is that the borrower does not have to make out-of-pocket payments during the life of the loan. Instead, borrowers take periodic distributions (or in many cases a single lump-sum distribution) that add to the loan balance and grow with interest.1

Then, when the loan is due (usually when the borrower dies or sells the home), the borrower or their heirs can pay off the balance and keep the home, sell the home to settle the balance, or let the lender sell the home. Importantly, too, reverse mortgages are usually “non-recourse” loans, meaning that the borrower is not responsible for the loan balance that exceeds the sale proceeds of the property.

From a theoretical perspective, reverse mortgages are appealing because they allow homeowners to draw down their housing wealth while simultaneously remaining in their home.

In the context of the “life cycle model” in economics, whereby individuals seek to maintain their prior standard of living throughout retirement, reverse mortgages can be a useful tool—especially for those without a strong desire to bequeath home equity to heirs;

we discuss these factors in-depth in section IV. In addition, reverse mortgages can be considered both longevity insurance and a hedge against falling home prices due to the feature that allows homeowners to remain in the home even after the balance on the loan exceeds the home’s value.2

https://www.brookings.edu/wp-content/uploads/2019/10/ES_20191024_BailyHarrisWang-1.pdf

“If you are looking for a ‘friendly discussion of the Reverse Mortgage’, don’t hesitate to pick up the phone and call Warren Strycker 1-866-334-1200 or email warren.strycker@patriotlendingusa.com. We invite your review of the many articles on this webpage placed here for your consideration.”

481920cookie-checkReverse Mortgages — “more than a niche product”?

2 thoughts on “Reverse Mortgages — “more than a niche product”?

  1. The HECM “newbies” are getting off course on their new input for retirement funds. This brings them back to the table — hopefully they will go away now but we are not convinced. Experts enjoy their “perts” says Warren Strycker ‘especially these last ones who want everyone to be happy with their confusion”, — longtime HECM professional. “Home equity conversion is going to be a crucial part of solving the retirement income problem,” Merton. One specific asset that needs to be tapped, says Merton, is the house you live in. For most, the biggest asset is not their retirement pension. http://gofinancial.net/2016/06/merton/

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