Financial Advisor Magazine:
“Reverse mortgages get a new look in pandemic times”
Rodney Dangerfield famously quipped “I don’t get no respect”. Reverse mortgage lenders and originators can certainly sympathize with that statement. However, a recent column last Thursday in the Financial Advisor’s online publication sees that changing. “The reverse mortgage market got some new respect earlier this year. When it looked like Covid-19 might wreck the retirement plans of older Americans, some turned to these mortgages to tap a new source of money.” HECM monthly endorsements in the fiscal year 2020 outperformed nearly all months from the prior year. Demand for the federally-insured reverse mortgage increased by 32% over the fiscal year 2019.
Yet, despite a significant spike in loan volume, a working paper submitted by the Pension Research Council at the University of Pennsylvania’s Wharton School suggests that older Americans aren’t using reverse mortgage home equity as much as they could be when compared to other developed nations. In the Financial Advisor column, Eric Rasmussen noted the simulations cited in the paper show that “17% to 25% of denied forward mortgage borrowers would have sufficient home equity to originate a [reverse mortgage] at their requested loan amount, corresponding to 98,000 to 147,000 older adults.”
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Chris Mayer and Stephanie Moulton discuss the slow uptake of the HECM in the U.S. in their paper ““The Market for Reverse Mortgages Among Older Americans.” “Potential concerns are many, including high costs, dicey sales practices, and the potential of retirees to lose their home if things go badly.” The paper noted most recent loans are adjustable rate and the steep 2% FHA insurance premiums could be hindering market acceptance.
The paper also noted the impact of the sudden departure of national-brand banks and loan originators in the wake of the housing crisis which led to loan volumes plummeting. When it comes to extracting home equity the chasm in acceptance couldn’t be bigger. Wharton researchers found 2018 HMDA (home mortgage disclosure act ) data reveals only 33,000 reported reverse mortgage transactions while traditional mortgage cash-out refis, HELOCs, and second liens recorded over 609,000 in the same year. Ironically the same study shows half of the applicants rejected for a HELOC or second were denied because they lacked the ability to make the required monthly payments. “Simulations show that between 26% and 36% of rejected HELOC and second lien applicants likely could have accessed a reverse mortgage”, says the study.
Anecdotal reports show increased acceptance of reverse mortgages by financial professionals. Yet, many remain reluctant to recommend the loan to their clientele. “I’ve looked into [them] on occasion for my clients,” says Vince Clanton of Chancellor Wealth Management in Atlanta. “The product has very high costs associated with the transaction. The sales cost is marginal, but there is an insurance component to protect the lender, and I think that is very expensive. The embedded interest rates are variable, and the cash available is limited. If someone is still working, a cash-out refinance is possible. If in retirement, it may be that the best option is to sell the home and downsize.”
As you, our viewers know, selling the home and downsizing is not always practical or desired. “When the market is volatile, it can be helpful to have a non-market correlated asset to draw from if your portfolio is down and these assets can help with this regard”, says Benjamin Offit of Offit Advisors in Maryland. In conclusion, it can be argued that the reverse mortgage has in fact garnered new respect- perhaps much in part to the COVID-19 pandemic, stock market volatility, high home values, and low interest rates. The question is how do we increase acceptance of one of the most powerful yet misunderstood loans available to older homeowners.
Additional resources cited:
Financial Advisors Magazine column: Reverse Mortgages Get A New Look In Pandemic Times
U Penn working paper: The Market for Reverse Mortgages among Older Americans
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3 Comments
I get tired of hearing about “downsize” as a housing option. A Realtor made the comment more than 20 years ago that to move down and save significant money, the borrower must move down at least 1/3 in price. The real number is more like half price or less. This is house to house, not house to condo or townhome because of HOA fees. The reason is that at least 10% of the house price will be lost to selling costs, closing costs, moving costs, and other expenses of the move. In some cases it is 20% or more when the person sells, rents, and then buys. The net effect is that for most people, it is virtually impossible to make the numbers work if they stay in the same real estate market. They can make the numbers work if they move to a lower cost market and leave their friends and support groups behind. Most people don’t want to do this. The real time to think about this issue is anytime they are buying a home. The question to ask is: “How will this home work when I am 100 years old?” You may think this question is not relevant to a 30 year old, but I have originated a HECM to keep a lady in her first home at age 104. The HECM paid for private pay care so she could stay in the home for the rest of her life. She lived in the same house for almost 70 years. I’ve had other borrowers stay in one house even longer.
When you ask “how do we increase acceptance of one of the most powerful yet misunderstood loans available to older homeowners”, it’s clear you don’t understand the borrower. The people controlling the industry are like people who have never been married trying to teach marriage classes, or people without children teaching parenting classes. They are young people (under 70) trying to set the rules for older people . They generally have never even talked to the customer. They look at statistics and think they understand. They don’t! I’m 74 and know my borrowers both during the loan process and for years after. Let’s start with some easy issues:
The loan application and closing packages are far more paper than necessary. At closing on Friday, the borrower was complaining about her hand cramping as she signed all the documents. I’ve had another borrower use a POA to sign because of difficulty writing. The people who create all this paperwork have no concept of the physical pain they create for some HECM borrowers.
The BBB required us to commit to nothing smaller than 12 point font as part of our Age Friendly designation. Many HECM documents contain font smaller than 12 point before the lender or title company shrinks the documents. No consideration is given to the fact that many HECM borrowers are dealing with cataracts or macular degeneration. Many HECM borrowers do not have a computer, email, or a smartphone. The people who control this industry have no concept of the vision issues these people deal with. I have borrowers who are incapable of reading loan documents, letters, or statements because of vision issues.
There is a move to electronic documents, but try reading electronic documents on a smartphone. Borrowers are routinely signing electronic documents that they don’t or can’t read. Even worse is that electronic signatures are being attached to documents by people other than the signatory. I know this because my signature is routinely electronically attached on closing documents without my permission. Who is checking for electronic forgeries before loans go into default?
The HECM documents ask for an alternate contact, but none is required. The obvious question that should be asked is “Who will handle your affairs when you can’t?” Unlike a forward mortgage, a HECM is intended to conclude with the borrower being either dead or unable to remain in the home because of some disability. Why isn’t some thought given to helping the borrower prepare for the end of the loan when they can’t handle their affairs?
I am getting too many complaints from borrowers in condos about forced place insurance. HECM servicers are too lazy to verify the HOA insurance. They write anonymous letters to the borrower demanding insurance verification. When the borrower responds, the servicer does not acknowledge the response and sends another letter. They refuse to talk to the borrower and explain what is needed. We have obtained the documentation the servicer needed in less than an hour. The servicer could not get it in four months and charged the borrower for forced place insurance. I’ve been forced to file a complaint with CFPB to get this resolved for one borrower. This is elder abuse by FHA, but no one will prosecute it.
In my continuing education class last Friday, there was an example of a discriminatory appraisal that was about $100,000 low. The home was restaged for a higher appraisal. When there is more than one appraisal, FHA requires the use of the lower of the two. There is no way to challenge a low appraisal. We had a prospect last year where the FHA appraisal on a Denver home showed the fair market value as $383,000, up from $380,000 four years ago. At the same time, the tax assessor determined the fair market value to be $659,300, up from $593,500 two years earlier. How can this be? Neither the appraisers nor any government agency has been willing to reconcile the differences. It seems that between FHA rules and Appraiser Independence rules, the borrower has no effective way to challenge a low appraisal. The effect of the high tax appraisal and low HECM appraisal was to tax the borrower out of her home to support “affordable housing”. If the value was $383,000 for both, she could afford the taxes. If the value was $659,300 for both, I could provide a HECM to pay the taxes. From my perspective, this was government elder abuse at its worst.
If you really want to gain more acceptance of the product, start looking at the product from the borrower’s perspective. Think about how the product can serve the borrower instead of how a TV personality sending prospects to call centers or web pages can make the most money. Help local reverse mortgage specialists who know the borrowers promote the product. Stop telling borrowers they have a year to sell the home when the loan documents say it is immediately due and payable. Try getting the regulators and people controlling the industry to tell the truth, the whole truth, and nothing but the truth.
I have plenty of stories of how a HECM has been life transforming for borrowers. A HECM competes with subsidized housing programs. Used to its fullest potential, this program could eliminate all government subsidized housing programs. It could significantly reduce Medicaid and other tax funded costs. Unfortunately, there is a huge and very powerful lobby protecting the government and subsidized housing jobs.
I have been involved with Reverse Mortgages for 20+ years and can relate to Don and his frustration and conclusions. I have encountered everyone one of the situations he has described multiple times.
The frustration we all encounter is hard to deal with but I continue because I can’t walk away from what we can provide, it can is a life changer for many who do not have other reasonable options.
Both Don and Frank are right. Many of us have experienced some of the problems that Don has but I appreciate Don’s well crafted description of them. Yet are those experiences so frequently encountered that change is required? In our industry the overall HECM process and experience needs further change but we who are originators need to focus on substantial problems to the origination process. Our complaints about servicing should first be addressed to our servicers but that does not mean we should not address those complaints outside of servicers but they need the tempering of servicers first.