The reverse mortgage industry faced some serious and significant challenges in 2010, probably led by the continued decline in home prices, which meant many senior borrowers weren’t able to extract as much equity out of their homes as they previously thought – or any at all.
The foreclosure epidemic continued to grow and spread. Many reverse mortgage borrowers defaulted on their loans because they couldn’t or didn’t make necessary tax and insurance (T&I) payments or required repairs on their properties.
At the same time, the FHA raised its annual insurance premium on reverse mortgages to 1.25 percent, up from 0.5 percent, to cover the costs from increasing loan defaults. In addition, the FHA lowered the amount seniors can borrow through its Home Equity Conversion Mortgage (HECM) program by as much as 5 percent, on top of the 10 percent reduction the year before.
But despite these setbacks, we believe the reverse mortgage industry is poised for a strong 2011. There is a continuing, growing need for reverse mortgages just as new products and lower pricing promise to open up the market to more seniors.
While some government changes to the FHA program make reverse mortgages less attractive for portions of the senior population, the government also made some positive course corrections that will significantly lower the cost of getting a reverse mortgage, which should broaden the appeal of the HECM program to more prospective borrowers.
The biggest change was the launch of the HECM Saver alternative program in October, which effectively eliminated the upfront mortgage insurance premium (MIP), reducing it to just 0.01 percent of a home's value. On a $200,000 home, that works out to an upfront premium of just $20. By comparison, the upfront MIP on a HECM Standard loan remains at 2 percent of the home’s value, or $4,000 on a $200,000 home. That’s an enormous difference.
In return for the lower MIP, there is a tradeoff with the HECM Saver, namely that depending on age, the amount a senior can borrow is between 10 and 18 percent less than on a HECM Standard. Both loans are assessed an ongoing insurance premium of 1.25 percent annually.
Different, Bigger Pool of Prospective Customers However, we don’t believe that difference will make the HECM Saver less attractive. On the contrary, the drastically lower fees and the smaller loan sizes will appeal to a different – and bigger – pool of prospective customers who have a less costly alternative to the HECM Standard mortgage, which was previously the only government-guaranteed reverse mortgage available. The HECM Saver should appeal to seniors who only want to take out a small loan to fund a limited project or who don’t plan to stay in their home for the rest of their lives, not to mention those who were put off by the higher, upfront insurance premium.
More good news is that along with the government reducing the costs associated with a reverse mortgage, lenders have followed suit with their own lower pricing. In order to increase business, many of them have reduced or eliminated their origination fees on reverse mortgages, and some are even paying the upfront mortgage insurance premium, making the loans even more affordable to seniors than ever before.
Which product – the Standard or the Saver – will garner the biggest market share going forward depends to a great extent on what happens to the performance of reverse mortgage-backed securities (RMBS) in the secondary market. If bond prices hold steady and interest rates stay low, more lenders will be able to offer a no-cost option on the HECM Standard, making it more competitive with the Saver. But if bond prices drop, as we think they eventually will, then the Saver will become more attractive. Either way, borrowers will have low-cost options going forward.
In addition, Congress recently extended the FHA’s lending limits on reverse mortgages, now ranging up to $625,500, through at least Sept. 30, 2011. That should continue to make more seniors eligible for reverse mortgages.
What the above actions show is that the government is going to continue to be supportive of the reverse mortgage program and help it to grow. We’re very encouraged by that.
The long-term argument for reverse mortgages remains as compelling as ever. There are currently 34 million Americans aged 65 or older. By 2030, that number is expected to more than double to 71 million, becoming 21 percent of the population. Moreover, there are presently more than 12 million seniors in the U.S. who own their homes free and clear, with an estimated $4 trillion in equity. That is a lot of loan collateral to be tapped. By the time the last of the baby boomers reaches age 62 in 2026, it’s conceivable that three out of four home-owning seniors may have reverse mortgages, assuming we have the support of the financial markets.
While that 75 percent might look like a pie-in-the-sky figure to some people, it’s certainly not unreasonable to expect that three-quarters of the senior population of this country will need a supplement to augment their finances in their remaining years and that reverse mortgages will play a major role for many. Recent reports indicate that not only is the senior population of this country continuing to grow, but their financial needs are growing even more so.
Over the next decade, the number of Americans 65 to 74 years old is expected to grow by 50 percent, a growth rate not seen in half a century, according to a recent report by the MetLife Mature Market Institute. There are now 36 million “early boomers,” (those aged 55 to 64); their number has increased more in the past decade than in the previous 30 years and made that group the largest it has ever been.
Requiring a Financial Supplement Moreover, according to the MetLife study, the notion of working until age 60 and then retiring is very likely over. Instead, financial obligations will force many seniors to continue working, some indefinitely.
A new study from the Brown School at Washington University in St. Louis found that 58 percent of those aged 60 to 84 will not have enough liquid assets to help them withstand an unanticipated expense or reduction in income. The study also found that nearly half of those between 60 and 90 will encounter at least one year of poverty or near poverty, a startling statistic. Clearly, many people will need additional financial resources, besides wages, retirement accounts and Social Security, to sustain themselves.
Many will turn to reverse mortgages, largely because the product is appealing. According to a recent survey conducted for the National Reverse Mortgage Lenders Association, nearly three-quarters of senior citizens who have a reverse mortgage said they were satisfied with the product, with 43 percent declaring they had a maximum level of satisfaction. In the study of 600 seniors who have had a reverse mortgage for at least two years, just 12 percent expressed the lowest level of satisfaction for the product. Seven of eight polled were content.
The survey garnered responses from 1,800 seniors, as well as their adult children, finding that nearly half worry they will not have enough money to support themselves in retirement.
We’ve even gotten some positive support from an unexpected but significant source. The AARP, after many years of being noncommittal about the product, has recently said that reverse mortgages might be a good idea for some people.
Rethinking the Customer Base Clearly, there is an immense and immediate need for reverse mortgages, and they resound positively with the public. So why have we barely scratched the surface penetrating the market? Perhaps the reverse mortgage customer is actually someone much different from whom we’ve thought. For example, recent studies indicate that the average reverse mortgage customer is no longer a 72-year-old widow. Rather, the more typical customers are more active senior couples in their 60s, and single men. For this reason, as reverse mortgage customers change, lenders and their marketing methods will have to adapt if we are to succeed and meet this huge customer demand.
We’ve recognized these changes at our own company. In early December, RMS went live with a new self-service website for our reverse mortgage customers. The new myRMloan.com will enable RMS customers to go online to review monthly and past statements, submit an advance request, check loan balances and other transaction activities, manage and update their profiles, download forms associated with the account, and get answers to frequently asked questions.
Basically, the new site – a first for the industry – empowers borrowers to log into their loan files and serve themselves. We expect there will be considerable interest in the site from both our senior customers and their adult children, who often assist in managing their parents’ reverse mortgage accounts.
Until recently seniors weren’t thought to be interested in such online services. It’s unlikely we would have done this five years ago. But seniors are getting more computer-savvy and coming to expect online access to an array of other services in their lives, from medical needs to merchandising. More of our customers have been contacting us through email, so setting up the website seemed a natural step for us to take. About 3,500 customers asked for online access to their accounts even before we formally promoted it.
The reverse mortgage is a great product. But that doesn’t mean originators and servicers can’t do things to make it even better to enable more seniors to avail themselves of its many benefits.