Tide Turns on Home Equity Trends, Reverse Mortgages Ahead

Americans have long held onto home equity, for many seeing the payoff of the 30-year mortgage as an important life milestone, and in turn, being unwilling to let go. Until now.

Whether the economic downturn has rebalanced Americans’ perspectives on homeownership or home equity is simply the last thing left for people coming of retirement age today, preferences toward the use of home equity are changing, according to an annual survey conducted by Ameriprise Financial.

Today, 47% of those approaching retirement age said they expect to use home equity to help fund retirement. The figure is up from 39% who said the same thing five years ago, pre-recession.

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The cause behind the shift may be due to the trauma experienced by households after having lost substantial value in their investments, Ameriprise speculates, or it could be they have no other place to turn. In any case, home equity tools can—and will—become more commonplace and more necessary in the years to come, retirement experts and researchers say.

“Households typically age in place and only sell the house when a shock comes along,” says Dr. Tony Webb, research economist at the Center for Retirement Research at Boston College.

Yet pointing to the relatively small number of households that utilize reverse mortgages, Webb says, the proportion has to change in response to retirement factors that are also shifting from one generation to the next.

“Although it may not seem like it, we’re in a golden age of retirement,” Webb says. “Households that are currently retired often have pensions, and there are still a decent number with retiree health insurance. But at least in the private sector, pensions are going away.”

Combine a shift away from employer-paid retirement benefits with the meager savings most households have amassed—the median being around $120,000, according to the Boston College Center for Retirement Research—and the house becomes the next thing in line to fund retirement much more quickly than in past generations.

“Given the final salary pensions going away and Social Security age going up; given health care costs increasing, households are in a bind,” Webb says. “The one asset almost all retirees hold is the house.”

Relatively speaking, even in the hard-hit areas of the country where homeowners saw property values plummet, the house still may look better than the other investments in a household’s portfolio, says Tucker Watkins, private wealth advisor with Ameriprise.

“People aren’t getting the interest they were used to. [Using home equity] has become more more favorable for a lot of reasons,” he says.

Pointing to an extension of loan limits above $600,000, as well as the introduction of the lower-cost Saver reverse mortgage, the picture has improved for those interested in tapping into home equity, he says.

“The costs are lower and the security is higher,” Watkins says. “It makes the reverse mortgage more attractive.”

Changing perceptions

The experts agree, there’s no question people are going to need more ways to tap into home equity. Yet the want to do so is another question.

Many have historically been hesitant take out a reverse mortgage for reasons that may not make rational sense, Webb says.

“There may be psychological barriers. They’ve spent their whole life paying off the mortgage. That’s a psychological explanation, not a rational one,” Webb says.

There’s also the consideration of how much wealth families have versus the amount of health they will have and forming a realistic expectation of the costs it will involve.

“Americans experience a disconnect between emotion and reality,” says Watkins.

Yet the sentimental aspect actually will help people to remain in their homes, boosting the instance of reverse mortgage loans in the future, Webb says.

“It’s easy to understand why households age in place. There’s sentimental value there, and family connections. If a household is intending to carry on living in the house, then why not tap equity?”

The future of the products only looks brighter as home values begin to rebound and a wider acceptance of home equity use continues.

“We’re very very far from being there yet but given the pressures on retirees, more and more will take advantage of these products,” Webb says. Further improving the picture are the recent signs of the housing market beginning to thaw. Year-over-year, Standard & Poors found prices were up nationally at a level of 7% in 2012 with a slighter gain predicted in 2013, but still a gain.

“Now we are seeing across the country prices firming up and going up, improving equity,” Watkins says. “The other thing appealing to seniors is they know if they get a reverse mortgage and the home value rises, they are less worried about leaving a legacy to their heirs.”

This edition of the RMD Report is sponsored by national appraisal management company Landmark Network.  

Written by Elizabeth Ecker

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  • And yet endorsement numbers just keep falling. This is not just a matter of not seeing a market at a plateau but one that is in decline. It is so hard for the industry to deal with that we keep telling fairy tales.

    The other day, I was reading an article posted late last month on how we are at about 60,000 endorsements each year. The last time that happened was fiscal 2011. Then the person talked about a peak of just over 100,000 endorsements. Well, the facts are our peak year was a little under 114,700 and last fiscal year the total was just under 55,000. Well, twice 55,000 is 110,000 which means we are now over 50% off our peak endorsement year and yet the trend is ever lower endorsements. While unlikely, there is a chance the total endorsements for this fiscal year could be less than 46,800 which would mark a loss of over 60% from the peak.

    While the irrational exuberance flavored Kool-Aid looks tempting, being left with a little healthy skepticism looks even better — at least for now. In case a few of us have been overcome with THE Kool-Aid, we have never been in such a bad situation. HUD is taking flak for the net loss position HECMs are in, we face an uncertain future with no fixed rate Standard and a continuing slide in endorsements despite recovering equity in many parts of the country.

    Oh yeah, then there is the bill in the Senate helping FHA by giving it authority to institute lender financial assessment and escrow accounts for establishing reserves for taxes and insurance at funding. While that will not come on line until so late this fiscal year that it will have little to no impact on endorsements for this fiscal year, it will NOT increase endorsements next fiscal year.

    We do not even know what FHA, HUD, and OMB (and later the CBO) are saying about the fiscal outlook for the cohort of HECMs which will be endorsed next fiscal year. That is normally known by this time of year.

    Reading about how seniors are planning to use the equity in their homes for retirement cash flow is about as helpful as hearing how endorsements will grow exponentially as more and more Baby Boomers turn 62. Well guess what? That process started in 2008 and look at where endorsement levels are today, less than half of what they were then.

  • In human affairs and in human decision-making rationality is often overrated as Dan Ariely has shown in his research and in his books. Baby-boomers’ presumed comfort with using debt bodes well for reverse mortgages if the big players can smell the tea and return to the business, as I believe they will if only to manage their looming suitability and litigation risks.

    • Atare,

      The theories of Mr. Airely are very controversial at best. Extreme irrational behavior in the financial realm led to both the dot com and mortgage securitization bubbles. Those who acted rationally and went against those irrational trends and behavior did well as did those who left those markets near their peaks.

      Certainly looking at the irrational behavior of Ken Lewis in acquiring Countrywide ranks as the most costly mistake to Bank of America shareholders he made. Then there is the price Bank of America (under the oversight of Ken) for the reverse mortgage operations of Seattle Mortgage. Looking at how quickly Bank of America came back to the industry and left again, who can argue with your idea that Bank of America may not irrationally come back to the reverse mortgage market in haste once again.

      The soon return of Wells Fargo seems more likely than the soon return of MetLife or Genworth. It is hard to believe that MetLife wants to the return to the origination side of the mortgage industry any time soon. Providing RM proprietary products in the future is another matter altogether. Genworth might be less adverse to returning to originating if either volume turns around, or profits per origination.

      After five years, the Baby Boom phenomenon has not had nearly the impact to our industry that has been predicted almost from the day the industry started if not before. Simply having more seniors eligible for reverse mortgages has done nothing to increase demand in RM proprietary products or even HECMs. Here we have fixed rate Standards, Savers, and HECMs for Purchase. None of these products have done much to add endorsement volume.

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