Reverse

Originating: Will We See a Lifetime Mortgage?

Written by Scott Gordon, as originally published in The Reverse Review.

The reverse mortgage has been around for about 25 years. The program has evolved since the beginning, most recently changing to protect borrowers and the insurance pool.

Society seems to be moving toward accepting the reverse mortgage more broadly and seeing it as a strong financial tool. The myths, while still alive, are starting to fade away. People are realizing the bank won’t take their house. Financial planners are beginning to see ways to use the reverse mortgage to extend retirement finances. Even Realtors are learning that the HECM for Purchase can help seniors purchase more home or a better, safer home.

The question used to be, “Are reverse mortgages safe?” Now the question is becoming, “Who did you get your reverse mortgage from?” When you see this level of acceptance, you have to start wondering: Are we moving toward a “lifetime mortgage?” Not the British definition, which we would call a reverse mortgage in the states, but a mortgage that you have for most of your life—a loan that starts out as a traditional loan and becomes a reverse mortgage at some time in the future.

People used to plan to pay off their mortgage and they looked forward to the day when they would own their home outright. But that has been changing. The cycle of keeping up with the Joneses has led many families to move their equity to ever-larger and more expensive homes. This keeps loan balances high, instead of getting them paid off.

Many Americans assume they will have a mortgage payment forever. Many baby boomers find themselves with equity in their home, but with quite a bit of mortgage debt left to pay off. When seniors want to slow down a little, it becomes harder to keep chipping away at that loan balance. The idea of stopping your mortgage payments and using your home’s equity to stay in place becomes appealing.

So as more people use a reverse mortgage to keep their family home for their senior years, are we moving toward a lifetime mortgage? That is, a loan that starts out as a traditional mortgage with a decreasing principal balance, but has a conversion feature that allows the borrowers to stop paying down the principal balance at some point, defined by program guidelines? Wouldn’t it be simpler for the homeowner to have this feature built in from the beginning? There is no crystal ball. It’s just a question.

A lifetime mortgage would have to be insured for all of the reasons a reverse mortgage is insured. So maybe the logical first choice for this experiment would be for the FHA to create an FHA-insured loan that can convert into a reverse at a future date. If that catches on, the feature could be added to other programs.

The advantages to the borrower are pretty clear. You only need to qualify and take out the loan one time. Once you have it in place, you have it, so you avoid most of the costs later, even if there were a conversion fee. It gives the borrower greater flexibility with their equity and could provide them with a line of credit once the loan is converted.

There are certainly some possible disadvantages. A loan that has so much future commitment from a lender might well come at a higher interest rate. The higher rate would effectively slow down equity growth, at least slightly. Also, the flexibility to convert might slow down a borrower’s drive to pay off or pay down their original balance, which could leave them with less equity. But maybe if they saw it as a retirement savings, they would make extra principal payments to effectively increase their savings.

There are roadblocks in place that would make it difficult to create such a product, not the least of which is the way loans are sold into the secondary market. It’s very hard to say how the market would take this kind of note. How do you value the possibility of conversion? What does the longer loan life mean to purchasers of the asset? Investors like to know the lifespan of an asset. The variability might be difficult to assume. There is a strong market for reverse mortgages, but this would be a different animal. There are very few one-time close products on the market right now. This would be the one-time close of the century!

The mortgage industry would have to decide what it thinks about this kind of product. On the traditional mortgage side, it might add a new product that gives a boost to some lenders. On the reverse side, just the topic may bring excitement and energy to the HECM market. But in the long run, if we had enough convertible products, we wouldn’t need originators to originate reverses. The reverse folks won’t want to be put out of a job, so they might not like this idea.

Will we ever see a lifetime mortgage? Not any time soon. But over time, markets find ways to give consumers what they want. And over time, markets and products become more efficient. If that happens, someday we may actually see an American lifetime mortgage.

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