The reverse mortgage industry is poised for a strong 2011. There is a continuing, growing need for reverse mortgages just as new products and lower pricing promise to open up the market to more seniors.
No mistake, the reverse industry faced some serious challenges in 2010. The continuing drop in home prices meant many senior borrowers weren’t able to extract as much equity out of their homes as they previously thought—some not at all. The foreclosure epidemic continued to grow and spread.
Another knotty problem has been unfolding as many reverse mortgage borrowers defaulted on their loans because they couldn’t or didn’t make necessary tax and insurance payments or make required repairs on their properties.
We have helped borrowers obtain counseling and have worked out repayment plans and taken other steps that have helped many stay in their homes. These actions, which our company began some time ago, now have been formalized by the government in HUD’s Mortgagee Letter 2011-01, “Home Equity Conversion Mortgage Property Charge Loss Mitigation.” It orders mortgagees to, within 30 days of the first missed payment, inform mortgagors of their obligation to pay T&I and that their mortgage, because of this delinquency, is not in compliance with FHA requirements.
We already have a good letter that we send to delinquent borrowers, telling them to pay their delinquent taxes and insurance or face possible foreclosure. Early on, we took some heat for sending such a letter, but now have been vindicated by HUD’s new requirements. While estimates vary, the best guesstimates put the T&I default problem at about 4% of all outstanding HECMs.
Against this backdrop, the FHA raised its annual insurance premiums on reverse mortgages to cover the costs from increasing loan defaults. It also lowered the amount seniors can borrow through its Home Equity Conversion Mortgage program by as much as five percent, on top of the 10% reduction the year before.
But while the recent FHA changes do make reverse mortgages less attractive for some seniors, the government also made some positive adjustments that will considerably lower the cost of getting a reverse mortgage, which should broaden the appeal of the HECM program to more borrowers.
The biggest change was the launch of the HECM Saver program, which effectively eliminated the upfront mortgage insurance premium, reducing it to a negligible 0.01% of a home's value, compared to 2% on the HECM Standard. That’s an enormous difference.
In return for the lower MIP, seniors can’t borrow as much with a Saver as they can with a HECM Standard. But that won’t make the HECM Saver less attractive. On the contrary, the drastically lower fees and the smaller loan sizes will appeal to a different—and bigger—pool of prospective customers who have a less costly alternative to the HECM Standard mortgage. The HECM Saver should appeal to seniors who only want to take out a smaller loan, plus those were put off by the higher costs of the Standard program.
At the same time, many lenders reduced or eliminated their origination fees or are paying the upfront mortgage insurance premium, making the loans even more affordable.
The long-term argument for reverse mortgages remains as compelling as ever. There are currently 34 million Americans aged 65 or older. By 2030, that number is expected to more than double, to 71 million, or fully 21% of the population. Right now, more than 12 million seniors in the U.S. own their homes free and clear, with an estimated $4 trillion in equity. That is a lot of loan collateral to be tapped.
At the same time, a growing percentage of the senior population will need a supplement to augment their finances in their remaining years, and reverse mortgages will play a major role for many. Recent reports indicate that not only is the senior population of this country continuing to grow, but their financial needs are rising even more so.
Over the next decade, the number of Americans 65 to 74 years old is expected to grow by 50%, a growth rate not seen in half-a-century, according to a recent report by the MetLife Mature Market Institute. There are now 36 million “early boomers,” or those aged 55 to 64.
Moreover, according to the MetLife study, the notion of working until age 60-plus and then retiring is very likely over. Instead, financial obligations will force many seniors to continue working, some indefinitely.
A new study from the Brown School at Washington University in St. Louis found that 58% of those aged 60 to 84 will not have enough liquid assets to help them withstand an unanticipated expense or reduction in income, and nearly half of those between 60 and 90 will encounter at least one year of poverty or near poverty. Clearly, many people will need additional financial resources, besides wages, retirement accounts and Social Security, to sustain them.
Many will turn to reverse mortgages in large part because the product appeals to seniors. According to a recent survey for the National Reverse Mortgage Lenders Association, nearly three-quarters of senior citizens who have a reverse mortgage said they were satisfied with the product.
The survey, which got responses from 1,800 seniors as well as their adult children, also found that nearly half worry they will not have enough money to support themselves in retirement.
Clearly, there is an immense and immediate need for reverse mortgages, and they resound positively with the public. Recent changes by the government and lenders have made a great product even more appealing to more people.
Robert Yeary is chairman and CEO of Reverse Mortgage Solutions Inc., Spring, Texas.
