Further decline in home equity endangers reverse mortgage industry
Since the financial crisis struck in 2007, American homeowners have lost more than $7 trillion in home equity, according to the Federal Reserve.
If the trend continues, the future of the reverse mortgage industry could be in jeopardy.
“The use of home equity will be integral to funding the longevity of the reverse mortgage industry, but growth can only occur if the public feels comfortable with the product and the companies that deliver them,” says Peter Bell, chief executive of the National Reverse Mortgage Lenders Association.
Bell spoke Wednesday on a conference call announcing the launch of a major public education campaign, titled “Borrow with Confidence,” to help bring greater clarity and understanding to individuals interested in reverse mortgages to manage personal finances.
Bell insists that home equity has halted its overall decline. “Stats coming out from various sources in the past few weeks show both that values are stabilizing and even rising in some markets, and household debt is diminishing, both positive signs for the economy overall, as well as our sector.”
However, the housing bust cut the median household net worth to $66,740 as of 2010 from $102,844 in 2005, according to Census Bureau data released Monday.
Middle-class Americans of all age groups and education levels suffered the worst blow because so much of their net worth is tied to the equity in their home. Excluding equity, the median net worth actually increased to $15,000 in 2010 from $13,859 in 2009.
The NRMLA points out that in cases where the value of a home is declining, and thus equity, a reverse mortgage is not appropriate.
Mortgage rates returned to all-time lows last week, but some positive indicators are hitting the housing market.
For example, construction on single-family homes rose for the third consecutive month in May to an annualized pace of 516,000. And homebuilder confidence rose in June to its highest reading in over five years.
Polishing an industry
As part of its education campaign, NRMLA developed a newly redesign consumer website that provides comprehensive help and information on the entire process of obtaining a reverse mortgage.
In addition to the website, the group released a booklet giving a step-by-step explanation of the process — from loan application to termination. It will also place Op-Eds in publications around the nation and utilize social media to engage the public.
NRMLA is partnering with the federal government as part of the campaign.
Bell says few incidents of reverse mortgage fraud have occurred over past few years, but when it does happen, he says, it tarnishes the rest of the industry.
In April, the U.S. Department of Housing and Urban Development prohibited four mortgage loan officers and a title agent from conducting business with the federal government because of their criminal convictions in a reverse mortgage fraud scheme.
“As an industry, we feel our reputation is key and simply cannot afford to have stories of isolated incidents get in the way of serving the senior population," Bell says. “It’s important for policymakers to understand the utility of the reverse mortgage product, the record this industry has had of self-regulation and our strong commitment to consumer protection."
Lack of understanding
Reverse mortgages let borrowers convert a portion of their home equity into cash. However, unlike a traditional home equity loan or second mortgage, borrowers can hold off on repayment until they no longer live in the home or fail to meet the obligations of the mortgage.
Even Bell admits a detailed explanation beyond that is “somewhat complex” to understand.
More than 600,000 of the 750,000 reverse mortgages originated under the Federal Housing Administration are outstanding. The remaining were paid off or terminated because the homeowner moved or passed away.
Bell says concern over reverse mortgages exist partly because they are oriented toward seniors, a population thought to be vulnerable. “I think there is some concern there,” he says. “And let’s face it, there is a general disdain for the financial services sector that exists and has been intensified after the last couple of years of the financial market meltdown.”
The term “reverse mortgage” is not a user-friendly term, Bell acknowledges, “but unfortunately it is what we have.”
Canada has a more friendly term: Home income plan. “That does have a much nicer tone to it so we do talk about repositioning the name,” Bell says. “Nevertheless, it is a reverse mortgage instrument, and that’s what the laws and regulations that permit us to do this type of loan refer to it as.”
The demographics point to a robust consumer base for the reverse mortgage industry.
The population of individuals 65 and up increased 15% to 40 million in 2010 from 35 million in 2000, according to the Department of Health and Human Services. It projects a 36% increase to 55 million in 2020. And by 2030, about 72.1 million older Americans, over twice their number in 2000, will exist — about 19% of the U.S. population.
“We are less than 1% of the eligible population, so there’s room to grow,” Bell says of borrowers holding reverse mortgages. “And I think there will come a time — maybe 10 years or so — when reverse loans become as ubiquitous as home equity loans. In effect, what we’re offering are home equity loans. The only difference is we have a deferred payment feature.”