A baby boomer turns 50 every eight seconds. This is only one of the amazing statistics that can be gleaned about the baby boomer generation. But the aging population marks an important change in the nation’s demographics. It is one of several which will have far-reaching effects on the future of banking, according to Eric S. Belsky, executive director of the Joint Center for Housing Studies at Harvard University.

“The biggest story is the aging of the baby boomers,” he said to mortgage professionals at the membership luncheon of the Massachusetts Mortgage Bankers Association last week.

The theme of Belsky’s talk was “The Borrower of the Future.” Belsky predicted significant changes in three areas: demographics, technology and regulation.

Demographics over the next decade will change significantly with the baby boomers aging, the influx of immigrants, the rising rates of minority homeownership and the soaring salaries created by new technology which will impact supply and demand of houses, he said.

The impact of baby boomers, whose ages ranges from early 40s to early 60s, has been felt at every stage of their development, he said. Banks have benefited from boomers’ large numbers for years but traditional revenues may dry up as they age, he said.

“By and large it’s good news, because people who reach that age have much greater wealth than any other time in their life,” said Belsky. By comparison, they are twice as wealthy as they were 10 years ago, he said. The proportion of people who own their own homes increases as people age into their 60s, he said. But the focus for lenders will shift, because these people won’t be buying first homes. This age group will either “buy up” to a grander home or “buy down” to a smaller property as a result of their children growing and leaving behind an “empty nest.” But that doesn’t always mean smaller loans, he said.

“We really love to conspicuously consume on houses,” he said. That means while houses may be smaller, they won’t necessarily be less expensive.

“We’re in a period where more and more people are buying second homes,” which is great for lenders. But the downside of this age group is that as people age into the 50s, they pay off their debt. Because the Baby Boomers represent a significant portion of the market, lenders are going to have to focus on increasing business, he said.

“One of the key goals in trying to grow the mortgage market is to try to get these baby boomers to refinance” or participate in reverse mortgages, he said.

Banks and mortgage companies will also see the numbers of minority and immigrant applicants rise significantly, he said. “Over the next 10 years nationwide, minorities will account for two-thirds of all households,” he said. Currently they represent one-fifth. Over the last four years alone, minorities have accounted for 40 percent of new homeowners. In Massachusetts recently, there has been a 40 percent rise in the Hispanic population and a 30 percent rise in the Asian population, he said.

That change will challenge the banking and lending industries and will also present incredible opportunity, he said.

It’s a challenge because many minorities lack the income and wealth and have poorer credit scores as a whole. In addition, there is a language barrier which banks will have to address if they wish to increase minority business, he said.

“I do see it as an enormous opportunity,” he said. “I think it is both an underserved and an emerging market.”

‘Enormous Outcry’
Banks are currently feeling the second wave of change across the nation, he said. That is, technology has allowed banks to provide almost instantaneous approval and the Internet has given consumers much more choice, he said.

“Technology is also going to drive consolidation in servicing,” he said. It will allow community banks to compete nationally through multi-lender sites where consumers can compare rates from several sources, he said.

“The next frontier in all of this is going to hinge on credit risk,” he said, adding that the industry has really gone as far as it can go with prime borrowers and will, therefore, increase the amount of subprime lending it does. According to a study conducted by Freddie Mac, one-third of buyers aged 25 to 40 wouldn’t be considered prime borrowers, he said.

That emerging market will help lenders expand their businesses but only if competition is encouraged, he said. “There’s an enormous outcry against predatory lenders,” he said. But the industry is already heavily regulated.

“The problem is, you’re never going to stop a sleaze from being a sleaze,” he said. The problem with setting up too much regulation is that only the predatory lenders will be left.

“You want to encourage competition in this area because otherwise the pipeline of new borrowers will dry up,” he said.

Belsky predicts lenders will focus increasingly on markets that were traditionally overlooked and underserved.

Future of Banking to Echo Progress of Baby Boomers

by Banker & Tradesman time to read: 3 min