Q&A: What’s Stopping Seniors from Using Reverse Mortgages?

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.

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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

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  • if it wasn’t such an expensive way to borrow money the industry may grow faster. Until someone needs it there will be only a few who utilize the expensive cushion. Wait until borrowers realize what they have when rates go up and they have a 3% margin or 4%, which Liberty is pitching with no costs. Anyone remember how that no cost fixed worked out??

    • “No cost fixed rate HECM”? I missed that one and would be interested to hear how it “worked out.”

      The no cost HECM LOC with a 4% margin SHOULD be being “pitched” as a stand-by credit facility for use in emergencies – something that is better to have and not need than need and not have. As such, the higher margin is really an advantage; it contributes to accelerated growth of the line, and IF tapped availability will be far more important than cost.

      The only “loser” on this product will be the lender IF the borrower is lucky enough never to have to tap the line.

  • John,

    Much of what you share is as true today as it was 20 years ago but much has changed and driven us to market to seniors in better financial situations today than 20 years ago. Today it is less about need and more about desire and goals.

    Today we are focused more on seniors who are looking to better their financial survival odds in retirement than those who are already in trouble. Today we are reaching out to financial advisors for referrals and less to seniors direct as we once did.

    Today we looking at a lending limit that is over 3 times what it was twenty years ago. Today we are dealing with bifurcated upfront MIP tied into the first year disbursements limitation. Today our ongoing MIP is not 0.5% but rather 1.25%. Our principal limit factors are about 83% to 87% of what they were twenty years ago. Today we have fixed rate HECMs and HECMs for Purchase which did not exist 20 years ago. Today our margins are 2 to over 2.5 times what they were 20 years ago. Our origination fee now has a decreasing rate structure with a cap while 20 years ago it was 2% with no cap.

    Our focus is going to mitigating risk from volatile markets rather than improving quality of life or the home paying you. So while we have not abandoned our past, fewer of us are embracing it as we once did.

    As to the interview, you are right. The interviewee is in Canada describing his view of HECMs which have no impact in Canada. Much of his advice is odd at best.

    • RMAdvisor,

      I could not agree with you more. Today’s Ball Game is played a lot different and those that can’t embrace the change positively, unfortunately will not make it!

      I appreciate your reply and your point of view, make it a great day my friend.

      John

  • As a senior and reverse mortgage client, I agree that the need for better education is the key but it is not only in the reverse mortgage industry. There needs to be a coordinated effort to better educate seniors and their families on retirement planning. This involves many areas that impact the quality of life seniors maintain. Retirement planning should be available and promoted by CPA’s, Insurance agents, elder law attorneys, the social security administration and other agencies that are part of this larger picture. Now, this is being done to some degree by those mentioned but it is not REQUIRED. The findings of the research reported is that seniors must have the need. We require first time home buyers to take a class to learn what their responsibilities are as home owners and mortgage payers. Financial planning doesn’t start when we approach retirement but it becomes far more crucial during retirement. Seniors need to have similar requirements to answer questions about long term care, when to take their social security benefits and how, what tax saving goals are in place and how are they implemented, where do they prefer to live during retirement and are their children involved in their plans? These questions and many more are key to better informed seniors and greater awareness of their choices. The HECM and other proprietary, reverse mortgage programs will become a more cohesive part of their planning but only once the other NEEDED issues are resolved.

  • Tommy,

    Before expounding on trigonometry, it might help to learn how to spell it.

    Yet the 30 minute phone call is a step forward depending on its content and the mortgage knowledge of both parties before the conversation begins. After all, as one of our peers constantly reminds us, a reverse mortgage is first and foremost a nonrecourse mortgage.

    Yet you are right. A 30 minute call alone only scratches the surface of a HECM in particular when one party but not the other understands them.

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