Increasingly Americans find themselves broke and more older homeowners my unwittingly be hurting their future chances of qualifying for a HECM (Home Equity Conversion Mortgage).

As of November, over 60% of Americans were living paycheck to paycheck, with 20% reporting they struggle to pay their monthly bills. According to Amber Carroll, senior vice president of membership and lifecycle strategy at LendingClub. Older Americans who have retired or continue to work are also feeling the squeeze. Consider this- 14% of baby boomers born between 1946 and 1964 have no savings to cushion unexpected expenses, most of which are financed on a credit card.

Credit Card Spending Surges

And speaking of credit cards more Americans are coming up short each month to cover daily expenses but that didn’t slow their holiday spending…

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Recent data from the Federal Reserve reveals a credit-fueled holiday shopping season with revolving credit and credit card debt surging at an annualized rate of 17.7% in November. But now that the holiday shopping hangover has set with consumers receiving their monthly statements and higher minimum payments- an untenable situation is unfolding, especially as most credit cards charge interest rate APRs that now run 25 to 30% or higher.

“If 60% of the economy lives paycheck to paycheck, as we’ve estimated, and a significant percentage of consumers tapped credit to finance their gifting, that means that 1) they’ve taken on even more debt that has been seen with the Fed’s November report and 2) they’re likely to feel a squeeze,” PYMNTS wrote earlier this week.

The Role of Home Equity

Consequently, older homeowners with substantial home equity who find themselves overleveraged with credit could unwittingly be reducing their potential HECM proceeds or jeopardizing their loan approval should a Lifetime Expectancy Set Aside or LESA be required.

Poor Spending Habits Can Disqualify Potential Reverse Mortgage Borrowers

The Financial Assessment is a key element for underwriting Home Equity Conversion Mortgages.  It measures an applicant’s financial capacity and willingness to meet their financial obligations by examining the homeowner’s credit history, payment of property taxes, and residual monthly income after all expenses. Consequently, those who max out their credit cards or other revolving debt with late payments or delinquencies could find themselves required to have a sizeable Lifetime Expectancy Set Aside. This account ensures monies are allocated to pay future property charges such as property taxes and insurance that mitigates the risk of a potential foreclosure. The result is the borrower has fewer loan proceeds, or even worse finds themselves short to close the loan. 

But 2024 could be the year of opportunity for older Americans who find themselves cash-flow-constrained. A growing consensus of economists expects that the Federal Reserve will cut interest rates several times in 2024. And that’s good news as the 10-Year Constant Maturity Treasury rate, which in part determines a HECM’s expected rate, typically leads the trend line for the Fed Funds Rate as shown in this chart. Lower rates and relatively stable home prices will be a prime opportunity for older homeowners to potentially eliminate required mortgage payments, and boost their cash flow by tapping into a portion of their home’s value. 

What say you? Do you believe we’ll see substantially lower interest rates this year? Speak your mind in the comments below. 

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