What factors contribute to consumers’ understandings of reverse mortgages, and their acceptance of these products, were the subject of major findings from academic research discussed at an industry event this week.
Overcoming the long-held negative perceptions and raising awareness of Home Equity Conversion Mortgages (HECMs) has the potential to increase the penetration rate by reaching more age-qualified borrowers who could benefit from a reverse mortgage, but have not utilized one.
HECM borrowers represent about 0.9% of all households with at least one member aged 62 years or older, according to AARP data cited in the Federal Housing Administration’s (FHA) Fiscal Year 2015 Actuarial Report of the HECM program. If this ratio is maintained, FHA says the number of reverse mortgages will continue to increase with the expected growth of the senior population, which according to U.S. Census Bureau projections, 21% of the U.S. population (approximately 69 million) will be age 62 or older in 2020, and 24% (86 million) by 2030.
“Furthermore, as longevity is expected to increase, more seniors may have insufficient savings to sustain their financial needs in retirement, potentially increasing the demand for HECMs,” states the FHA Actuarial Report issued Monday.
But before HECMs can really begin to move the needle in terms of greater acceptance from consumers, the industry needs to know what factors are hindering greater acceptance and utilization of reverse mortgages.
“A HECM is quite a complicated product,” said Thomas Davidoff, associate professor at the Sauder School of Business at the University of British Columbia in Vancouver, Canada, presenting on his findings Wednesday during the National Reverse Mortgage Lenders Association (NRMLA) annual gathering in San Francisco.
“You take a really complicated product and you mix that with a population that generally has a hard time with finance, and it’s just hard for anybody and for retirees that have a hard time with basic calculations; like if you’re earning 2% interest, do you get more or less than 10% total return over a five-year period?” he added.
Davidoff’s research, “Reverse Mortgages: What Homeowners (Don’t) KNow and How It Matters,” co-authored by Patrick Gerhard and Thomas Post from Maastricht University in the Netherlands, hypothesized that perhaps an absence of reverse mortgage understanding is getting in the way of people utilizing these products, particularly HECMs.
To test this theory, Davidoff and his co-researchers conducted 575 questionnaires targeting U.S. respondents who were mostly caucasian, affluent, age 58 and older; asking them a battery of questions on a variety of topics, including their general product knowledge of HECMs, interest and experience in using HECMs, whether their friends have used reverse mortgages, and questions about their personal financial picture.
The good news: of the total respondents, 97% said they had heard of HECMs, while 83% answered correctly to the statement: A reverse mortgage allows you to draw wealth from the home.
Many respondents also understood that when you get a reverse mortgage doesn’t necessarily make you debt-free, even if you use it to pay off an existing mortgage (43% who answered correctly vs. 28% who answered incorrectly). About one quarter of respondents, Davidoff said, didn’t venture an answer.
Understanding of reverse mortgages, however, declined when it came to questions asking about the non-recourse feature and what happens when you’re unable to pay interest payments—key details associated with HECMs.
“There are a lot of attractive features of the HECM, about which borrowers are not particularly aware,” Davidoff said. “It’s a complicated product, and not entirely surprising, the population doesn’t have a great awareness of it.”
After gathering data on consumers’ knowledge of reverse mortgages, Davidoff and his fellow researchers then explored the factors associated with respondents’ acceptance of HECMs.
Characteristics such as low income and having pre-existing mortgage debt were two key elements associated with demand for HECMs. Being risk tolerant was another key factor tied to likeliness to obtain a reverse mortgage, as well as a person’s pre-existing health insurance, if available.
“People who express an unwillingness to take on risk and people who find themselves without adequate insurance for long-term care express more concern about taking on a reverse mortgage,” Davidoff said. “If you are cash-poor, you like HECMs; if you don’t care about leaving money to your kids, and if you’re not too worried about future financial or medical risk, you like them. Those are the people who find reverse mortgages can be attractive products.”
Although people who know more about HECMs and their rules were more likely to get a reverse mortgage, this raised further questions regarding availability of knowledge. For example, did those people with greater understandings only accomplish this because they put in the effort to seek more information and research on reverse mortgages?
In efforts to justify this grey area, researchers then did a treatment, providing one part of the survey group with a screen that explains the HECM product description, essentially giving them the answers to the “battery” of questions they were asked previously during the study. Another survey group was then not provided with the HECM product description.
Unfortunately, after asking both groups—after they have read the information or not—whether they like a HECM, researchers were not able to detect a difference in whether their sentiments toward reverse mortgages were influenced even after being provided information of the product.
“I’d like to tell you that the problem was purely a lack of knowledge, but you have to be careful, because at least in our survey, randomly injecting people with a little bit of knowledge did not jack-up expressed demand for HECM,” Davidoff said.
“HECMs are complicated and most near-retirees have an incomplete knowledge of the product,” he added. “The theory is some know what it is, but their obligations are quite hazy. Those with the most to gain from HECMs—poor people, people who don’t have strong bequest motives, those who had run into financial trouble—are exactly the people who understand the product the least.”
Written by Jason Oliva