Inflation is eroding retirees’ dollars. Here’s where home equity may help

We are likely headed toward an era of historic inflation in the United States. Not the news one wants, especially if they’re retired. However, there’s one safe haven for millions of senior homeowners; their home. The years leading up to the initial outbreak of the coronavirus pandemic were notable for record gains in home price appreciation. During this time the rate of inflation plodded along at its typical annual rate of 2-3%. 

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Surely there would be no consequence for the trillions of dollars spent or borrowed. Wrong. 

Last spring Americans began feeling their dollars shrink as the cost of goods and services increased, and that surge continues today with the latest government estimates showing a 7.5% annual inflation rate. How severely the Federal Reserve decides to hike interest rates depends if the central bank believes inflation has already reached its peak. If long-term inflation and continued improvement in employment is the expected trend the Fed may choose to take a more aggressive stance on their planned rate hike schedule and accelerate the selling of securities to take some money out of circulation.

One group of Americans is bearing the brunt of inflation; seniors. American Advisors Group surveyed over 15,000 participants between the ages of 60 and 75. They found two-thirds or 66% are worried inflation will harm their retirement. More than half or 53% admit the cost of living is higher than anticipated, and 37% say they will need to increase their cash flow to maintain their standard of living. With the NRMLA/RiskSpan Reverse Mortgage Market Index showing homeowners 62 and older holding over $10 trillion in home equity the appeal of reverse mortgages should surge. The question is will homeowner acceptance of the loan increase before home values moderate or fall and interest rates climb.

In other news, consumer mortgage-related complaints to the Consumer Financial Protection Bureau surged during the pandemic. 618 reverse mortgage complaints were received by the CFPB between March 1st, 2020 and January 31st, 2022. Of those 63% were related to loan servicing with borrowers complaining about difficulties in struggling to pay loan obligations. Common servicing complaints included pending foreclosure actions, application of borrower-submitted payments for property taxes, approval of short sale requests, and difficulties in obtaining a payoff. It should be noted that during the same period reverse mortgages accounted for only 1.26% of complaints filed with the bureau against conventional, FHA, VA, and other mortgages, albeit, not adjusted for that cohort’s loan volume.

And speaking of servicing, National Reverse Mortgage Lenders Association President Steve Irwin wrote that FHA shouldn’t be in the business of servicing reverse mortgages. In his open letter published on Reverse Mortgage Daily Irwin enumerates recent improvements in the HECM program including the Financial Assessment, and the Collateral Risk Assessment (or 2nd appraisal). He then points to the next challenge to help improve the HECM’s financial performance- improvement on the back-end of the HECM life-cycle.

If the phrase ‘improvements on the back-end’ sounds familiar, it’s because former FHA Commissioner Brian Montgomery used the same phrase referring to continued HECM losses. Irwin suggests leaving post-loan assignment duties with the original loan servicer rather than with HUD or their contracted servicer. Instead, he argues for continuity. “FHA shouldn’t be in the reverse mortgage servicing business. Companies that specialize in servicing HECMs should be able to see a HECM case through to its proper conclusion. Enabling a current HECM servicer to continue with its loan administration duties, post-assignment, benefits HECM borrowers”, said Irwin. He does acknowledge some challenges in adopting such a servicing model however, kudos to Irwin and NRMLA for taking a stand on such an important issue that has to date received little attention. 

Resources cited:
Inflation spike – how it is affecting senior homeowners
Seniors Worry Over Inflation, While Home Equity Wealth Grows
NRMLA President: ‘FHA shouldn’t be in the reverse mortgage servicing business
CFPB consumer complaint database
AAG retirement survey

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