If the first thing you think of when you hear “reverse mortgage” is an Alex Trebek infomercial on late-night TV, you haven’t even scratched the surface of the reverse mortgage market and its potential to bring in booming profits for the lending industry. Older homeowners are sitting on trillions of dollars in home equity that represent a real opportunity in the face of declining purchase mortgages.
Home equity conversion mortgages, more commonly known as reverse mortgages, have been insured by the Federal Housing Authority since February 1988, when President Ronald Reagan signed it into law as part of the Housing and Community Development Act of 1987. The first FHA-backed HECM loan originated in 1989 from James B. Nutter & Company.
Since then, the share of reverse mortgages in the overall industry has seen its ups and downs, but in the current environment the industry is growing, and growing fast.
The National Reverse Mortgage Lenders Association’s Q4 2016 report on senior home equity, published in March 2017, reported a $170.7 billion gain in home equity, bringing the total value to $6.2 trillion.
These gains saw the NRMLA and RiskSpan Reverse Mortgage Market Index (RMMI) reach an all-time high of 221.75, the highest the index has reached in its 17-year history. In a press release, the CEO and president of the NRMLA, Peter Bell, explained that this increase exhibits how equity can be beneficial for retired homeowners and that now is the time to start looking at it as a viable and strategic option for seniors.
“The strong RMMI in the fourth quarter of last year shows that home equity continues to be a valuable asset for homeowners 62 and older,” Bell said. “It’s time for consumers to study what it means to have home equity and to learn about its strategic uses, including how it can be used to support retirement goals.”
Bell further explained that the numbers are also encouraging for future retirees who might be facing a less than pleasant retirement. “The positive trend is also reassuring for homeowners nearing retirement age who are less likely than their predecessors to leave the workplace with a defined benefit plan and also more likely to have long-term debt,” he said.
Additionally, the Department of Housing and Urban Development’s 2015 American Housing Survey reported that 76% of the 11.9 million households led by people age 75 or older own their homes, while the remaining 24% are renters. HUD also reported that for this demographic, the median home purchase price was $53,000, but the median value of this group’s homes was $150,000. This equity position is much higher than for homeowners overall, where the median purchase price was $127,000 and the median home value was $180,000. HUD’s 2015 report also shows that 78% of older homeowners owned their homes outright.
In February, the Urban Institute released a report, Seniors’ Access to Home Equity: Identifying Existing Mechanisms and Impediments to Broader Adoption, which detailed the reasons older homeowners have reservations when considering home equity as a possible source of retirement income.
The paper’s data is backed by Fannie Mae’s National Housing Survey, which found that 37% of senior homeowners felt concern for their finances during retirement and only 6% of seniors are interested in utilizing home equity as a financial solution.
With all of this equity available to capitalize on and use to bolster retirement income, why aren’t more senior homeowners taking advantage of products like reverse mortgages?
According to the Urban Institute report, authored by Laurie Goodman, co-director of the Housing Finance Policy Center, and research associate Karan Kaul, these reservations reflect a misunderstanding of how reverse mortgages, home equity lines of credit and other similar financial tools work, and a fear of leaving debt to family members after death. Many people, including seniors, have a preconceived notion about home equity and how it works.
Among many factors outlined, the most important was that there is very limited appetite for tapping into equity, which may be attributed to two things: first, seniors want to avoid going into further debt and risk losing their home; and second, continued advancements in health and medicine allows seniors the ability to work until later in life, deferring the need to tap into home equity.
But some factors for the low participation rate go beyond behavior patterns and medical advancements.
In a blog post featured on Fannie Mae’s website, the authors explained that there are gaps in information and education that contribute to the low rates of equity extraction.
“Beyond these behavioral factors, structural impediments to equity extraction are also at play, including poor financial literacy, the complexity and high costs of some mortgage products, and fear of misinformation and fraud, particularly with respect to reverse mortgages,” the blog post read.
“Post-crisis credit tightening has also affected home equity lending. As varied as these impediments to equity extraction are, they all ultimately lead to one outcome: enormous untapped housing wealth that represents both a potential solution to the financial strains facing some elderly homeowners and a significant untapped market for the housing finance industry.”