Lenders who do not offer the Home Equity Conversion Mortgage option to qualified borrowers when it aligns with their financial objectives are not just missing out on a good business opportunity — they're falling short on their responsibility to borrowers.
As homeowners approach retirement, their objectives and qualifications change — sometimes dramatically. A HECM, whether as an alternative to a home equity line of credit; a way to "age in place" in an existing home; to purchase a new home; or as a sophisticated way to extend the life of an investment portfolio merits significant consideration by senior borrowers.
Lenders who don't offer HECM to qualified borrowers may not be criminally negligent, but the argument can be made that they are guilty of disregarding the "spirit of the law" as articulated by Dodd-Frank and enforced by the CFPB. The spirit of the law is about placing consumers' interests first. Placing a borrower in a mortgage he or she cannot afford is not in the consumer's best interests. But isn't it almost as bad to put the consumer in a mediocre loan when a better alternative is available?
The U.S. government created the Home Equity Conversion Mortgage program with the explicit purpose of providing new options to borrowers age 62 and older. According to the Census Bureau's 2013 American Housing Survey, more than 65% of homeowners 65 and older own their homes free and clear. These homeowners are among the millions of potential borrowers over 62 with enough home equity to qualify for a HECM.
Just how serious are the potential drawbacks for homeowners who could get a HECM, but don't? For starters, borrowers may run out of retirement savings years sooner without one. A 2012 study by Salter, Pfeiffer and Evensky of Texas Tech University found that homeowners entering retirement with both home equity and a retirement savings nest egg could extend the life of their savings over a 30-year period by as much as 85% when using a HECM as part of a financial strategy called "sequence of returns."
Using that strategy, borrowers rely on different sources of retirement income depending on how the stock markets perform. When markets are favorable, borrowers use their normal retirement savings to pay for living expenses, leaving their HECM credit lines untapped. When the stock market performs poorly, retirees switch to drawing on HECM lines of credit to pay for living expenses, leaving investment portfolios alone until the markets recover. Without the HECM option, borrowers must draw on their normal retirement savings regardless of market conditions — and that depletes portfolios at a much faster rate.
This strategy also benefits heirs. Borrowers who are better-funded for retirement don't have to seek financial support from their adult children. Studies also show that HECM borrowers are more likely to leave their heirs with a higher estate value at end of life than non-HECM borrowers.
Lenders should offer HECM to qualified borrowers not as a last resort, but as soon as they qualify: at age 62. The longer borrowers wait, the more likely they are to do unnecessary damage to their investment portfolios — and the fewer options they will have if they need to make a change to their housing situation.
While studies indicate older Americans want to "age in place," that doesn't necessarily mean they want to remain in the same house they've owned for decades. For many, aging in place means purchasing a newer, lower-maintenance house or condo. Unfortunately, retirement-age borrowers may not make enough to qualify for a traditional mortgage. Using a HECM to purchase a new residence can be a great option, because the financial requirements are somewhat less demanding than those of a traditional 30-year mortgage. Further, using a HECM to purchase a home frees up some of the profits received from the sale of the previous residence for investment in a retirement savings fund.
Even borrowers who could qualify for a traditional mortgage may prefer a HECM because of the flexibility it offers. With a HECM, borrowers can make monthly payments to reduce the loan balance like a traditional mortgage if they choose, or they can stop making payments altogether, or they can turn it around and have the lender send them a check monthly. What's constant is that borrowers must pay property charges like real estate taxes, hazard insurance and homeowners association fees. This arrangement offers peace of mind in a time that is often marked by financial uncertainty.
You don’t have to be an expert on reverse mortgages to bring them to your borrowers' attention. In fact, many of our lender partners feel strongly that reverse mortgages are best explained by specialists who know all their ins and outs. Loan officers who aren't HECM experts can build a strong referral business by serving as the conduit between a reverse mortgage specialist and referral partners such as builders, real estate agents and financial advisors.
Jeff Birdsell is vice president of professional services at ReverseVision, a reverse mortgage technology provider.