Reverse mortgage market penetration will increase if only more qualified potential borrowers are better educated about Home Equity Conversion Mortgages (HECMs). But understanding the reasons holding seniors back from getting reverse mortgages
Knowledge of reverse mortgages is strongly related to demand of the HECM product, and that knowledge is “fairly low,” according to a report titled “Reverse Mortgages: What Homeowners (Don’t) Know and How it Matters.”
“That is, lack of product knowledge is a crucial factor explaining the low demand,” states the report co-authored by Thomas Davidoff, PhD, associate professor for the Strategy and Business Economics Division at the University of British Columbia Sauder School of Business.
The report sought to understand the financial literacy, as well as interest, of U.S. homeowners aged 58 and older to assess their knowledge of reverse mortgages and how this impacts the demand for these products.
Of all respondents surveyed, 97% indicated that they have heard about reverse mortgages, while 18% of respondents know at least one other person that has a reverse mortgage. Only ten respondents, about 2% of the sample, had practical experience with reverse mortgages.
A major conclusion of the research affirmed what many in the reverse mortgage industry believe: that seniors who would most benefit from a reverse mortgage are more likely to accept the product, however, opportunities are missed because not many of these seniors have a good knowledge of reverse mortgages, let alone HECMs.
To learn more about what has been influencing seniors and how this hinders greater HECM utilization among more age and income qualified borrowers, RMD caught up with Tom Davidoff to gain a better perspective into his research and how it can help the reverse mortgage industry in its efforts to raise awareness of the HECM product.
RMD: The crux of your report explores how a lack of knowledge is hindering greater utilization of reverse mortgages among potential qualified borrowers, and among those who might benefit most from a reverse mortgage. What drove you and your colleagues to take on this research?
TD: There’s a general view that retirement finance is a hard thing to get right. So we wanted to see to what extent are people familiar with reverse mortgages, and that maybe a lack of understanding might be a barrier to the market growth.
I think it’s fair to characterize the results that, yes, a lack of understanding seems to be associated with a lack of interest in the HECM product.
RMD: In your research, what do you find are the most common factors having an impact on the low demand for reverse mortgages?
TD: A lack of understanding is definitely a factor. People really want to hold onto their home equity. It might be because they worry about things like going into a nursing home and they might need the cash.
Another factor, most retirees are not interested in spending down home equity. So even if people were fully informed [on reverse mortgages], there would be less people interested.
The argument a lot of people make is that it’s nice to spend down your home equity, but it’s expensive because of the fees. But the way a HECM is structured through the line of credit is like a ‘lose money machine’ for the government.
If you took a line of credit and just let the balance grow and only draw it at the end of your life—even if you used a reverse mortgage that way, for a lot of people you would expect to make money from it. So to me, that is really powerful evidence that people don’t understand the product.
Using the credit line to insure yourself against living a long time or seeing your home value crash—75% of Americans should have used it for that basis.
RMD: Can you talk a bit about the methodology used in the report, in terms of who did you target, what their demographic profile looked like, and what types of questions were asked to gauge reverse mortgage knowledge?
TD: We tried to get as representative as we could of people who would think of getting a reverse mortgage. The demographic [we viewed] doesn’t look like the average reverse mortgage, because it’s people who are Internet sophisticated and wealthier than people who actually use reverse mortgages.
We asked a battery of questions about the design of HECM. Things like: Are you aware of the product? Do you have a reverse mortgage? Are you thinking about having one? Would you be willing to get one?
RMD: For concerns such as being able to leave a legacy to heirs, fear of losing one’s home, as well as other misconceptions regarding reverse mortgages, in your opinion, what is needed to help allay these qualms commonly tied to reverse mortgages?
TD: People are generally fearful of those wanting to sell retirees financial products. I think finding and creating some entity that is perceived to be even-handed and provides correct information about reverse mortgages would be great.
But there is certainly scope for further education. I think it’s clear that the population of people eligible for HECMs don’t understand the product that well.
RMD: From your perspective as an academic, what could be some areas of improvement for the reverse mortgage industry to increase exposure of the product and raise educational awareness?
TD: There is a fundamental problem with reverse mortgages throughout the world, and that has to do with the option to default on the loan. I think what you want to do is design a product that has lower loan-to-value and that has bigger or partial interest payments. Having a low cost, lower value product is a valuable step.
RMD: Do you have any reverse mortgage research in the works currently, or plan to undertake some future research on the subject?
TD: I’ve been doing quite a lot on “value of default” options. What I’ve seen is borrowers are not ruthless. That is to say, when they leave their home with the home worth less than what they could borrow on a line of credit, I find no evidence that increases their propensity to borrow.
Default option, what people do with it and how they value it, is critical. I think a product with lower LTV, but more escrow is probably a better product than the product now.
Written by Jason Oliva