Fox Business: Reverse Mortgages Attracting Younger Borrowers

Reverse Mortgages are no longer of interest to only older retirees, but rather an increasing number of younger baby boomers have begun looking toward the equity-tapping loans as a retirement asset, Fox Business reports.

The demand among younger borrowers, Fox hypothesizes, could be the product of a “punishing economy,” as well as an increasing number of reverse mortgage loans offered by the Federal Housing Administration. 

Fox Business writes:

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It can fill gaps. Ken Weingarten, a financial adviser from Lawrenceville, New Jersey, had one couple in their mid-60s take out a reverse mortgage so the 67-year-old husband could defer his Social Security benefit for three more years. He expects the couple, who had little savings, to pull no more than $60,000 out of their reverse mortgage. But that 3-year delay will increase the husband’s permanent Social Security benefit by about 8% a year for each of the three years he defers, and that makes it worthwhile.

It still isn’t cheap. Even though FHA has created a lower cost reverse mortgage called a “saver” loan, closing costs can approach $20,000 or more on some reverse mortgages. And the interest rates run higher than they do for typical mortgages. Finally, because borrowers make no monthly payments, the balance on these loans actually grows as interest is assessed.

These are no-recourse loans. That means that you won’t owe the lender more than the sales price of the home, even if the loan eventually outstrips that. So if the couple above build a loan balance of $1 million and sell their house (at a fair market rate) for $700,000, it would be as if they got away with a free $300,000. That could theoretically offer a strategic opportunity for young borrowers, suggests David Hultstrom, a financial adviser from Woodstock, Georgia. But it would be risky.

Couples have to be careful. Sometimes a married couple will remove one partner from the home deed so the other can take out a reverse mortgage. That’s not a good idea: If the borrowing spouse dies, the remaining spouse may be stuck with a balance due and no affordable way to repay it.

In the past, where reverse mortgages were viewed as “last-ditch” emergency funds, borrowers should be conscious of when the right time is take out the loan, as tapping home equity at a young age may not leave enough left down the road in 10 or 20 years, Fox Business writes. 

Read the Fox Business article.

Written by Jason Oliva

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  • There are two stories in this one article. The first is deferring Social Security benefits and the second the great myth of the unusual lowering of the average age of HECM borrowers.

    There are many reasons why in the situation of a married couple, deferring Social Security benefits of one spouse for a few years could be an excellent decision. However, there are still substantial risks which must be considered. The tone of this portion of the comment would have been much different if the borrower were single.

    There is a huge myth in the industry about the average age of new borrowers dropping dramatically in the last few fiscal years. The FHA HECM Characteristics report for September 30, 2012 does not bear that out. It seems the myth got started by an overreaction to some data taken from FIT report information gathered over 2 years ago. Since the information was not compared to equal quality data, one has to question the validity of those comparative findings to begin with.

    Per the FHA report (not the outdated and questionable FIT findings), the average age of the youngest borrower at initial funding on HECMs endorsed during last fiscal year was 71.9 years old, a drop of just 0.3 years from the fiscal year before. Yet that is not the age of the average borrower, just the average age of the youngest borrower. Since the percentage of HECMs with multiple borrowers rose by 0.5%, it is likely that the drop in the average of all borrowers was less. However, since there can be numerous borrowers on a HECM, it is hard to determine whether the average age of borrowers overall went down or, perhaps, even went up without additional information from FHA.

    What is clear is that the average age of the youngest borrower is following the trend for the average age of seniors over 62 years old. As long as the number of Baby Boomers coming into that population base each year exceeds the number of those dying from within that base during that same year, the average age of that population base will drop. So is a drop of 0.3 years or less really all that phenomenal? In fact this is not a change in the profile of HECM borrowers in particular as much as it is a reflection of the general change in demographics we have been seeing in that segment of the population for over 14 years. In the last 23 fiscal years, the average age of the youngest borrower has dropped just 4.8 years.

    For example, in the seven fiscal years since fiscal 2005 the average age of the youngest borrower dropped 1.9 years and, between fiscal 1998 and fiscal 2005, the average age of the youngest borrower also dropped by 1.9 years. As one leader in the industry used to respond when presented with such statistics: “Old news!” In fact in those same seven year segments, the number of multiple borrower HECMs rose 7.2% from 1998 to 2005 and then only 0.3% from 2005 to 2012. Yes, the percentage of HECMs endorsed in fiscal 2005 with multiple borrowers was higher than in fiscal 2011. In fact that percentage hit its peak in fiscal 2006 at 38.8% about 0.6% greater than that same percentage for fiscal 2012 (38.2%).

    So what is all of this overreaction to a long-time trend (at least for our industry with only 23 fiscal years of history)? Its promoters seem to have an agenda in mind but unfortunately it is based more on puff than substance. Using such questionably derived information has a tendency to backfire on its promoters at the worst possible times.

    The foregoing comment is the opinion of its author and not necessarily that of Security One Lending or its affiliates.

  • Although this article makes some valid points the lack of knowledge regarding reverse mortgages by the author still hurts the overall message.

    The comment “closing costs can approach $20,000 or more on some reverse mortgages” is a very misleading and borderline irresponsible remark. Like any other mortgage the closings costs are a direct result of the amount of the mortgage be secured.

    Also, “sometimes a married couple will remove on partner from the home deed so the other can take out a reverse mortgage.” All major lenders stopped this practice in January of 2013.

    We must, as an industry, dispel these half-truths and misinformation that still surround the reverse mortgage industry before we will be accepted in mainstream America.

    • Mr. Banner,

      Perhaps those who have not been around since late 2004 do not remember the days when the costs of some proprietary reverse mortgages exceeded $20,000. We did several which were.

      In context the author stated it exactly right: ” Even though FHA has created a lower cost reverse mortgage called a “saver” loan, closing costs can approach $20,000 or more on some reverse mortgages.” It is not up to the author to explain how the costs are computed.

      Just because the practice has recently been terminated by even the largest lenders, that does not mean there will not be exceptions or that the practice will not be permitted in the future particularly as the thorny issues are dealt with.

      But you are very, very right. Our industry has been trying to lose the high cost image for years. It is not up to reporters to get that done but as correctly say: “We must….”

      This comment is the view of the author and not necessarily that of Security One Lending or its affiliates.

  • That’s a solid reason for doing the reverse mortgage for folks where maybe one is still working. I think there’s been an argument here or there in the message sections about deferring SS and the argument’s always been “what if you don’t live long enough to make it to that date?” If you don’t…you don’t need the SS anyway.

    • wealthone,

      You have your facts wrong. The issue for an unmarried Social Security beneficiary is not if they will live long enough to get the benefit but rather to recover the benefits lost plus earnings on those foregone benefits.

      Many unmarried seniors want to maximize their benefits. That has a lot of considerations including risk tolerance.

      As to married couples, the issues are quite complex.

      Reading your comment, it would be a good idea for you to speak to someone who actually understands the issues and the various options available to seniors. Many seniors leave tens of thousands of dollars and in some cases hundreds of thousands of dollars because they do not properly make the right elections or use the right techniques.

      This is one area where seniors should be advised to seek the help of a competent Social Security planning professional.

      The opinions expressed are not necessarily those of Security One Lending or its affiliates.

      • My comments were based on a married couple, just like the article. My facts were correct, I said someone on here has argued against deferring and you quickly answered the question as to who(m). Social Security planning IS important, there’s no doubt about that but its also very “strategic” in retirement planning as shown in this article from a day or two ago. http://www.pbs.org/newshour/rundown/2013/03/how-a-start-stop-start-strategy-can-maximize-your-social-security-benefits.html

        The reverse mortgage provides yet ANOTHER option to combine with SS planning that MAY or MAY NOT work for some married couples and as complex as it is, it can’t be said that a RM shouldn’t be a consideration. That is this man’s opinion.

  • wealthone,

    I was replying to your very incorrect statement that “the argument’s always been ‘what if you don’t live long enough to make it to that date?'”

    There is a huge difference between living to the start date of benefits and living long enough to see a reasonable reward for the benefits lost through deferring. Perhaps we need to debate the difference. In most cases that would require living at least until some years past current life expectancies, depending on the view of the senior as to what constitutes a reasonable return for the risk.

    The reward should reasonably compensate the risk. In the single beneficiary situation, employing a debt laden strategy is much more difficult to justify than in a married couple situation. But even in the latter case, care must be used in not oversimplifying what the strategy should be. This is a complex situation requiring the help of a competent Social Security benefit planning professional.

    It is troubling to see that you know so little about about risk and how it should be addressed. It is not just a question of living until the start of receiving benefits. Your reply shows why we must guard against conflicts of interest. It is a question of finding the best strategies, weighing their relative risks versus rewards, and then making a decision.

    And, yes, like all other leveraging propositions in the deferral strategies, reverse mortgages should be considered but the real issue still boils down to analyzing all significant risks versus rewards. Part of this analysis is working within the context of the risk tolerance of the senior. HOWEVER, it is also clear that too few seniors have employed this strategy and should have. The problem lies in so few seniors understanding their Social Security options.

    While this reply does not necessarily represent the opinions of Security One Lending or its affiliates, it does represent that of a CPA with a concern about the best interests of seniors.

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