Reverse mortgages will be as ubiquitous as individual retirement accounts in 10 years because many folks will have more money in the former than in the latter, says Scott Norman, vice president of Austin, Texas-based Sente Mortgage's reverse mortgage division.
Norman says the forces of supply & demand and education will serve as the engine for his prediction's materialization that every extended family will have a member with a reverse mortgage.
“There’s still a great deal of education — for financial planners, certified public accountants, home health care professionals, real estate attorneys — that needs to be done,” Norman says. “We haven’t even scratched the surface yet.”
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, fail to meet the obligations of the mortgage or pass away.
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.
Norman says Sente Mortgage views reverse mortgages as a product with unlimited upside, a natural financial planning option for aging Americans within the housing economy. He favors the Home Equity Conversion Mortgage Saver, a type of reverse mortgage offered by the Federal Housing Administration that requires drastically lower upfront fees — just .01% of the home value — than the HECM Standard, but reduces the amount of money available to the borrower.
“As the baby boomers continue to age and home values stabilize, the question is ‘How are they going to retire?’’ Norman says. “Pull up average 401(K), average savings amount, average debt. These seniors aren’t going to be able to retire at a fraction of what they’re living today. I don’t think I’m exaggerating."
“I’m not saying a reverse mortgage is for everybody, but it is certainly an option that may be the most realistic for a majority of the seniors in the next five to ten years,” Norman says. “It’s safe, it’s cost efficient. The biggest complaint you have regarding reverse mortgages is not the product, but that it's expensive to grow old in America.”
They're also confusing, according to the Consumer Financial Protection Bureau, which released a report highlighting the risks for American consumers as they struggle to understand reverse mortgages.
“Reverse mortgages are complex and have the potential to become a much more pervasive product in the coming years as the baby boomer generation enters retirement,” said CFPB Director Richard Cordray.
The CFPB report found that while consumers are largely aware of reverse mortgages, few completely understand them. “Many consumers struggle to understand how their loan balance will rise and their home equity will fall over time with a reverse mortgage,” the reported stated. “Some borrowers do not understand that they need to continue to pay taxes and insurance with a reverse mortgage.”
Norman concedes that some of the bureau’s conclusions were “relatively accurate” and applauds the bureau for embarking on such a study. However, he scolds it for not consulting consumers while conducting the study and forming conclusions. The CFPB has yet to respond to inquiries about Norman's claim.
According to the CFPB study, 70% of borrowers are taking out the full amount of proceeds as a lump sum rather than as an income stream or line of credit. “This raises concerns that consumers who take out all of their accessible home equity upfront will have fewer resources available later in life. They may not have the money to continue to pay taxes and insurance on their homes, which can put them at risk of losing their home,” the report stated.
As part of a public education campaign, the National Reverse Mortgage Lenders Association developed a newly redesign consumer website in June that provides comprehensive help and information on the entire process of obtaining a reverse mortgage. NRMLA is partnering with the federal government as part of the campaign.
Norman, meanwhile, doesn’t think the CFPB’s findings are wrong. He just doesn’t think they went far enough.
“Most of the seniors we deal with are smarter and wiser than we’ll be in the next 20 years,” Norman says. “These are smart people. They lived through World War II. We haven’t.”