Seniors Turn to Reverse Mortgages For Help With Everyday Expenses: Survey

Regular HW readers know that the reverse mortgage market has been booming as of late, for two distinct reasons: first, the greying of American baby-boomers continues, and for many, their home is their most significant asset as they head into retirment. But reverse mortgages have also been booming because so many former brokers and loan officers have figured out the demographics, and the implosion of the residential lending market has led to a mass exodus of sorts for many former brokers.

Has this been good for seniors, now facing near-daily marketing and sales messages suggesting that they take out a reverse mortgage? Interestingly, a survey released on Wednesday found that the number one reason borrowers take out a reverse mortgage is to pay for daily living expenses — only 3 percent say they used the funds from a reverse mortgage loan to take a vacation.

But with the growth the industry has seen thus far, those numbers should be seen as ominous, some sources have said.

“With reverse mortgages booming, if so many people are having to use these tools because they wouldn’t otherwise meet their everyday living expenses, just wait until the Boomers really arrive,” said one source, a money manager who asked not to be named. “This group has saved less than any generation before them.”

The survey, conducted by the Consumer Credit Counseling Service of Greater Atlanta, Inc., found that 19 percent of borrowers took out a reverse mortgage because their budgets were too tight; another 16 percent did so because they needed “more liquid assets” — whatever that means — while 15 percent used the funds to pay for home repair and maintenance. Another eight percent obtained a reverse mortgage to pay for dependents or medical bills.

A reverse mortgage is a loan that allows homeowners to convert the equity in their homes into tax-free income without having to sell the home, give up the title, or take on a new or additional monthly payment. Borrowers must be 62 years or older, and the loan “matures” when the borrower dies.

“We expect the demand for reverse mortgages to grow significantly as baby boomers reach retirement and need funds to meet daily expenses,” said Sue Hunt, manager of reverse mortgage counseling for CCCS. “It is important for homeowners to educate themselves about reverse mortgages. Credit counseling can help them understand how these loans work.”

What’s perhaps the most interesting trend, however, is one that has yet to play out: the market need for reverse mortgages is rising as housing prices are dropping precipitously in key housing markets — just as many Boomers are looking to retire, and right after many have already tapped the equity in their home to fund a high cost of living.

“There are alot of soon-to-be-retirees out there that could be in for a shock,” said one source, a reverse mortgage originator who asked not to be named. “Many are seeing the equity they’d need to qualify disappear by the month right now.”

Of course, that’s not true for all retired and near-retired homeowners, many of whom own their homes outright. But the trend of paying down a mortgage over time is also one that’s been changing with the Boomer crowd, say experts, who suggest that the run-up in housing prices convinced many to cash out of their home’s equity as recently as one year back.