It used to be a “now it’s time to relax” product. Now, reverse mortgages are increasingly being used to fill financial holes in borrowers’ financial strategies for what used to be called their golden years.
Home equity conversion mortgages (HECMs) were introduced in the early 1990s to help equity-rich but cash-poor senior homeowners afford to stay in their homes. They can take a lump sum or draw on a credit line, giving them an additional means to extend or maintain their financial independence.
The HECM market retrenched significantly during the housing crisis, but has made a comeback as home values have recovered. But the borrower profile has changed, as has the outlook for lenders if and when interest rates rise. Interest rate caps on the life of the loans are gaining traction in the HECM market.
Borrowers want access to the money now for present and future use at today’s rates; lenders are understandably reluctant to leave all that credit hanging out there for the same reason – lenders can’t securitize and sell the credit until it’s drawn down.
Meanwhile, demand for HECM loans is up. The FHA reported in May that HECM originations were up to $4 billion in the first quarter of 2014, up from $3.4 billion in fourth quarter of 2013.
Relatively younger borrowers (minimum HECM eligibility age is 62) are using it as a cash-flow bridge to delay applying for Social Security in order to receive larger, later Social Security payouts, consistent with the findings of a 2012 study by MetLife Mature Market Institute in partnership with the National Council on Aging. (Note: MetLife exited the reverse mortgage business in 2012, as have many other large lenders.)
The study, titled “Changing Attitudes, Changing Motives: The MetLife Study of How Aging Homeowners Use Reverse Mortgages” drew on 21,240 mandatory HECM pre-loan counseling interviews. The findings: borrowers’ use of reverse mortgages has transitioned from a sailboat-like lifestyle enhancement strategy to a lifeboat. Forty-six percent of prospective borrowers are under age 70. One in five – 21 percent – are Baby Boomers, age 62 to 64, who apply despite lower available loan limits for them. That’s up significantly from the 6 percent of prospective borrowers in that age group in 1999.
The study found that 67 percent of respondents sought to pay existing debt and defer monthly mortgage payments rather than enhance their lifestyles (27 percent). Also, 67 percent of respondents have a conventional mortgage that will need to be repaid.
Last year, the FHA issued a set of new HECM rules to address the problem of borrowers who took out all their equity in a lump sum and later could not keep up with property taxes and hazard insurance, as HECMs requires. Lenders must now verify that borrowers have sufficient residual income to make those payment, and if they don’t, a portion of the HECM proceeds must be set aside for that purpose.
If the sailboat has turned into a lifeboat, the preservation of its integrity is all the more important. The housing stock held by elders must eventually pass to younger hands, and it will be best if there’s not too much ballast in the boat when it does.
