Reverse mortgage originations are down, but industry experts say the product is poised for a comeback.
‘The state of the business is in constant change,’ says Peter Bell, president of the National Reverse Mortgage Lenders Association (NRMLA) in Washington, D.C. ‘This has been true for us for over 15 years. This is nothing new for us.’
What is new is that in January, the U.S. Department of Housing and Urban Development (HUD), in its Mortgagee Letter 2013-01, announced that the Federal Housing Administration (FHA) will consolidate its Standard Fixed-Rate Home Equity Conversion Mortgage (HECM) and Saver Fixed-Rate HECM pricing options.
Before, homeowners could opt to receive money as a line of credit, monthly payments or a lump sum. Interest is added to the loan amount each month, at either a fixed or variable interest rate. Borrowers pay back the principal plus interest when moving out or selling the home, or the estate pays the amount when the borrower dies.
Now, the fixed-rate, lump-sum option will no longer be available. The change was effective for FHA case numbers assigned on or after April 1, 2013. Loans originated before April 1 must close by July 1.
Bell notes that the fixed-rate HECM was the most popular reverse mortgage, accounting for 70% of the market, but he predicts no ill effects. ‘Will that diminish consumer appetite for those loans? I don't think so,’ he says. ‘I expect to see an uptick in volume.’
According to the NRMLA, in fiscal-year 2012, there were 54,676 HECM loans endorsed by HUD for FHA insurance. That was down from 73,093 for 2011, and in 2010, the total was 78,758 – dramatic decreases from the 2009 peak of 114,639.
Scott Norman, vice president of the reverse mortgage division for Sente Mortgage in Austin, Texas, predicts those figures will increase as baby boomers retire. Many older adults do not have enough savings to last them through retirement, so they look to their home equity as a funding source.
‘Many people don't want to sell their home, so a reverse mortgage may be the most realistic option,’ he says. ‘It's expensive to grow old in America, and 10,000 boomers retire every day.’
That figure refers to research from the Washington, D.C.-based Pew Research Center, which in 2010 noted that from Jan. 1, 2011, through the next 19 years, 10,000 baby boomers turn 65 each day. Also according to Pew, 35% of adults age 62 and older say they postponed retirement because of the recession, and 60% of adults age 50 to 61 say they will have to postpone retirement.
Norman thinks many retirees will seek reverse mortgages to solve their retirement savings shortfalls. ‘I believe that in 10 years, reverse mortgages will be as popular as IRAs are today,’ he says.
Just as individual retirement accounts needed some explaining, so do reverse mortgages. That is a challenge, says Steve Weisman, a professor at Bentley University in Waltham, Mass.
‘Reverse mortgages are difficult for consumers to understand, and misleading advertising has led to poor consumer choices,’ he says, citing a report that the Consumer Financial Protection Bureau (CFPB) provided to Congress last year. Also, Wells Fargo, Bank of America and MetLife have withdrawn from writing reverse mortgages.
‘The withdrawal of larger players is leaving the market dominated by small originators who may not be up to the task of dealing with changing economic conditions and changing regulations,’ he adds.
Weisman notes that the changes in the standard HECM are not necessarily bad. ‘Many purchasers of reverse mortgages unwisely got the large lump sums provided by the fixed-rate HECM and misused the funds, leaving them in a precarious position as they became older,’ he says.
Delores Conway, associate dean and professor of real estate at the Simon School at the University of Rochester, agrees that the HECM changes are positive. She points out that the FHA made the changes because the agency insures the loans and, according to the CFPB, one in 10 reverse mortgages are in default. The FHA is looking to improve its own finances.
‘It will help to strengthen the program in the long term,’ she says. ‘The banking industry is still undergoing change from the financial crisis, so we are still working through all of that.’
Bell hopes that media reports will stop referring to reverse mortgages as the loan of last resort. What might help, he says, is if the marketers reach out to financial planners instead of directly to consumers.
‘Look at pharmaceutical companies,’ he says. ‘They tell you to talk to a medical professional. I think that's where this industry is headed. If you want help managing your cashflow, ask your trusted advisor about a reverse mortgage.’
Nora Caley is a Denver-based freelance writer.