The Brookings Institution: Reasons for low HECM uptake and how to expand market growth
Despite the more Americans retiring without sufficient savings to fund their non-working years, reverse mortgages remain a niche product- one whose acceptance has shrunk considerably in recent years. This conundrum is addressed in a recent paper released by the Brookings Institution entitled, “The unfulfilled promise of reverse mortgages: Can a better market improve retirement security?”
It’s ironic when you consider the increasing debt held by older Americans, the near-complete disappearance of pensions from private sector companies, and increasing longevity. One would conclude this should be the golden age for reverse mortgages- but it’s not. The authors of the paper from the Economic Studies at the Brookings Institution made their case on why the Home Equity Conversion Mortgage is not widely accepted and how the HECM can move from being merely a niche product to one that has widespread acceptance. For those of you not inclined to read the report here’s our brief summary.
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Offering cures even if the related problems are fully described, does not mean that a fundamental answer has been given to a subject asking a question. The discussion by the panel for the Brookings Institute meeting summarized above is such an example.
Discussion leaders seemed far more intent on discussing their topics than addressing the issue of Why the HECM Remains a Niche Loan? While the speakers presented their idea of how to improve the HECM, NONE addressed the issue of what makes a HECM, a niche loan.
For example, one speaker talked about the purchase of an annuity with the HECM. Most HECMs today are not fixed rate products, nor do all borrowers take the net principal limit at closing as a lump sum distribution of proceeds. In fact a SPIA (single premium immediate annuity) rarely produces sufficient earnings to pay the interest and MIP charged on the purchase price of the SPIA with a HECM. Then if the problem of interest arbitrage is actually addressed on an adjustable rate product, in some cases the author may be right but in other cases perhaps not, thus increasing risk without any offsetting significant incremental award to the borrower or the lender. A question that this speaker NEVER addressed was how his plan would appeal to HMBS investors in this product. What was clear from the presentation was the research was generally stale and specifically static as to changes in the interest rate on an adjustable rate HECM.
The program would have been effective (and no it was not) if the subject, which is very relevant, had been divided by topic which collectively show why HECMs can be accurately described as niche. Qualified speakers should have been assigned to each major topic with the moderator summing up the presentations in a conclusive word on how collectively the speakers demonstrated the HECM is indeed a niche loan. Then if there was sufficient time, the speakers could address cures and the feasibility of those cures in an open session.
It seems many are happy when educators, in particular, from a foreign country who have little experience with HECMs come up with rather questionable answers simply because they are out of the box. I do not share that view. In fact I lacked any confidence in the overall conclusions of the speakers. Once again Ms Moulton demonstrates that there are other approaches to financial assessment that is far less draconian than the financial assessment currently in place.