In the U.S., the reverse mortgage industry is currently weathering a rather rough patch, but perhaps this is nothing compared with its Australian counterpart.
Australia, too, is looking for ways to support its aging citizens. After all, the retirement crisis that looms over the U.S. defies geographical borders as the global population continues to age and life expectancies continue to rise.
Earlier this year the Australian government discussed plans to budget for all citizens over 66 to take a reverse mortgage as part of a larger plan to help older homeowners age in place. And that seemed quite promising for the nation's reverse lenders, until the Australian Securities and Investments Commission decided to investigate.
Its report, released last month, raised serious concerns about the health of the nation’s reverse mortgage program, claiming that lenders were failing to properly educate consumers about the risks of the loan.
The AISC investigation reviewed 111 loan files and determined that in 92% of them, there was no evidence that the broker or bank discussed with borrowers how the loan would affect their finances in the future and their ability to pay for possible needs as they age.
In Australia, just five banks originated 99% of all reverse mortgages in the last two years. And now that two of those lenders have since left the space, reportedly because of regulatory uncertainty, business will moving forward be divvied up by just three lenders.
The report called this lack of competition concerning, stating that it may be inflating interest rates and fees.
“Reverse mortgage products can help many Australians achieve a better quality of life in retirement,” ASIC Deputy Chair Peter Kell said. “But our review shows that lenders and brokers need to make inquiries that would lead to a genuine conversation with customers about their possible future needs, not just a set of tick boxes on a form.”
The ASIC also determined that loan contracts from all five lenders had “the potential to be unfair,” and that four out of five lenders made no or minimal inquiries into the borrowers’ financial status and whether or not they could meet the obligations of the loan.
This stands in stark contrast to the U.S. reverse mortgage program.
In 2014, the U.S. Department of Housing and Urban Development instituted Financial Assessment, which requires lenders to assess a borrower’s “ability and willingness” to keep up with the obligations of the loan, which include the payment of property taxes, homeowner’s insurance and basic home maintenance.
While FA was a tough adjustment for lenders, many agreed that it helped ensure borrowers were properly suited to take on the loan, decreasing the likelihood of defaults and bolstering program's the long-term sustainability.
Furthermore, while U.S. reverse mortgages have always been non-recourse loans, Australia did not implement any protections against negative equity until 2012, when it put mandates into place to prevent borrowers from owning more than the home was worth and ensured they could remain in the home until they passed away or opted to move.
But like the U.S., the Australian reverse mortgage business is just a fraction of the lending market, comprising just AUD$2.5 billion compared with the total home loan market of AUD$1.6 trillion.
According to The Sydney Morning Herald, some banks are questioning whether they want to stay in the space at all.
“Due to the complexity of reverse mortgages and the relatively small market size, and the negative perception of the products, there are questions over whether it is worth banks' while to offer these loans,” the article stated.