Lower Costs, Price Transparency Key to Higher Reverse Mortgage Take-Up

It’s no secret that the penetration rate is abysmally low for retired homeowners who could potentially benefit from getting reverse mortgages. But new research suggests that improvements to loan costs and the market’s lack of price transparency could increase take-up rates for reverse mortgages.

Despite the potential appeal of reverse mortgages to retirees who could benefit from tapping into their home equity for retirement, the demand for these loans has been “extremely limited,” says Deborah Lucas, distinguished professor of finance in the Sloan School of Management at the Massachusetts Institute of Technology, in a recent report titled “Hacking Reverse Mortgages.”

Originations of new reverse mortgages against home equity held by people age 62 and older have occurred at rates of less than 3% in recent years, Lucas notes, pointing to previous research conducted by researchers from Ohio State University.


“This points to a reverse mortgage puzzle: Why is a government-subsidized financial product that appears to solve the problem of liquefying home equity for many older households so unpopular?” Lucas writes.

Previous studies have shed light on the economics and demographics associated with reverse mortgage adoption rates. In several cases, researchers found that a variety of factors are hindering take-up rates for reverse mortgages, including a lack of product understanding among prospective borrowers, as well as this group’s general reluctance to spend assets that they plan to leave as bequests (i.e. their homes).

Loan costs to borrowers also play a significant role in why the current penetration rate is low. But why are costs to borrowers so high? Lucas attributes this to several factors, namely a lack of competition among lenders exacerbated by an “opaque” market that makes comparison shopping difficult.

“For example, consumer groups point out that competition on loan spreads appears to be inhibited by lender not publicizing what those spreads are,” she writes. “Furthermore, many potential borrowers may not have the know-how to comparison shop for financial products.”

Consumers may also find it difficult to comparison shop due to the array of interest rate and payout choices that are available to them.

“Greater choices contributes to the difficulty of comparison shopping,” Lucas writes. “Most borrowers may also not understand that their choice between a fixed and floating rate has consequences for investors’ cost of hedging, and hence for the price they ultimately pay.”

The intent of Lucas’ research is to evaluate the cost of federal credit programs and government investments on a fair value basis, with the aim of improving the information about cost that is available to policymakers and the public.

Reverse mortgages are complicated to value, either as an academic exercise or for market participants, and the cost estimates presented are subject to considerable uncertainty, Lucas acknowledges in the conclusion of her findings.

“The analysis suggests that possible changes to the current program that could reduce complexity and costs and encourage greater borrower demand,” she writes.

However, there is still much more to be done, Lucas says, “including better understanding and incorporating into the model the effects on cost of longevity and interest rate risk, perhaps using data on the secondary market pricing of HECM securitizations.”

“Other open issues include whether the annuity pricing is competitive with that offered by insurance companies, and whether the industrial organization of the industry is an impediment to more competitive pricing,” she added.

Written by Jason Oliva

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  • This comment is not for the weak of heart. This comment attempts to summarize the PowerPoint Presentation (PPP) titled “Hacking Reverse Mortgages” by Dr. Deborah Lucas at:


    In the PPP Dr. Lucas takes on the financial practices of our industry. On pages 9 and 10 she refers to HECMs as subsidized for a reason. She claims that in literature among the reasons for low endorsements is: “distrust and lack of understanding exacerbated by the product’s complexity.” But that is not her conclusion but rater the following on Page 10: ” The analysis here suggests a simpler and purely financial reason: HECMs are very expensive for borrowers.”

    The presentation claims that HECMs are costly to borrowers. “The average fair value NPV is ($27,000)” to borrowers. These are phenomenal accusations which start at Page 11 and continue through the end of the presentation.

    Besides borrowers, ” HECMs are expensive for the government” with an “average fair value NPV of ($4,000) per loan. That means that “the winners are private lenders, average fair value NPV of $31,000 per loan.”

    In the final case, it shows each loan is costing the borrower an average $27,000. The government loan cost is $4,000 per loan. So if a HECM costs borrowers $27,000 and government $4,000, the total gain of $31,000 goes to the private lenders. Dr. Lucas also addresses something she calls “the ruthless strategy” which is about double the cost to the borrower. Total net cost (after MIP offset) to HUD at $4,000 per loan as of this date means about a $2.5 billion loss to HUD.

    There is much more in the presentation but the following sentence stands out: “The finding that a federal guaranteed loan program provides greater benefits to guaranteed lenders than to the intended beneficiaries is not unique to HECMs.”

    The presentation in the PPP is not the same as the work of Dr. Salter, Dr. Sacks and his brother, Dr. Sacks, Dr. Wagner, Harold Evensky, and others. This is probably NOT the best article to give prospects or financial advisors.

  • I would suggest that the greater “cost barrier” to adoption of reverse mortgages is the up-front vs on-going cost, and ‘market opacity’ has little to do with IMIP and/or third-party costs which are wholly beyond the control of the lender.


      What if a home is appraised for $150,000 and all of the available proceeds went to pay off the existing mortgage but the upfront costs were $6,900. If the average effective interest rate is 4.9% how much will those upfront costs become at HECM termination 25 years later? About $32,000. For what in substantial part is called “junk” fees by most originators, that is pretty expensive.

      But now let us look at the ongoing MIP of 1.25% on that same loan if the balance due was $85,000 at closing and in the 25 years there is no activity related to the small line of credit and no borrower pay downs. The actual dollar cost of the ongoing MIP is $62,794. If the ongoing MIP were still at an annual rate of 0.5%, the cost after 25 years would be $22,397.

      Yet, Dr. Lucas seems to be discussing the lender premium on the HECM.

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