Researchers Reveal Biggest Roadblocks to Reverse Mortgage Borrowing

While negative misperceptions have largely hindered the appeal and acceptance of reverse mortgages among would-be borrowers, research shows that these afflictions aren’t the only factors preventing senior households from tapping into their home equity later in life.

It’s no surprise that the vast majority of U.S. seniors are unwilling to spend down their home equity for retirement purposes. If this wasn’t the case, it would be easy to surmise that the market penetration rate for reverse mortgages would receive a significant lift from its current underachieving proportion of 2% of the age 62 and older population who could potentially benefit from home equity extraction.

Not only are seniors uninterested in spending down their housing wealth, but they typically do not spend down their financial assets either, according to research presented during the National Reverse Mortgage Lenders Association’s 2016 Annual Meeting & Expo in Chicago this month.


“We obviously know that the elderly don’t spend down their housing wealth, but what’s interesting is that this is almost as true for financial assets as it is for home equity,” said Chris Mayer, CEO of Mahwah, N.J.-based reverse mortgage lender Longbridge Financial, during a research panel discussion at this year’s NRMLA conference.

Two major challenges

Among the biggest challenges impacting home equity extraction in recent years are lower homeownership rates and rising mortgage debt among U.S. senior households, Mayer said, referencing a research paper he wrote for the University of Chicago that will be published in early 2017.

In his research, Mayer, who also serves as the Paul Milstein Professor of Real Estate and Economics at Columbia Business School, relied on the Survey of Consumer Finances conducted every three years by the Federal Reserve. Because the most recent 2016 data was not yet available, the findings were based on the Survey’s most recently published data in 2013.

Tracking homeownership mortgage data and home equity from 1992-2013, the research showed that while the homeownership rate had increased for retirement age people, rates had fallen over the years for those coming into retirement.

For people currently at retirement age, the homeownership rate was between 77-80% in 2013, an increase relative to two decades ago, Mayer noted. On the flip side, people in the age group who are nearing retirement experienced a decline in homeownership; below 70% for adults ages 54-59.

“What this means is that although there are more people coming into retirement, fewer of them are homeowners and a lot of them aren’t homeowners because they either lost their homes or had to sell their homes during the financial crisis,” Mayer said. “We should recognize that housing is less available as a solution for retirement—or home equity for retirement challenges—than for the current group of elderly.”

Exacerbating this concern ever further is the fact that more homeowners are reaching retirement age with higher mortgage debt than in the past. Among people in their 70s, whereas 10% of these adults had a mortgage in 1992, about 30% of people ages 72-77 had a mortgage they were paying off in 2013, according to Mayer’s analysis of the Fed’s Survey of Consumer Finances.

The share of retirement age homeowners carrying higher mortgage debt than they possess in financial assets has also grown over the years.

Of those age 60-69, approximately 25% had more mortgage debt than financial assets in 1998, compared to 40% of this age group in 2012, based on data from the Health and Retirement Study (HRS) sponsored by the National Institute on Aging and the Social Security Administration.

“So not only is mortgage debt growing but, in fact, mortgage debt is outgrowing the amount of savings that people have and this includes 401(k) plans in the financial assets as well,” Mayer said.

The HRS is a longitudinal study, meaning data is gathered for the same subjects over a period of time. This allows researchers to track participating households until the point before death. People spend down very little of their wealth up until the point just before they die, Mayer found. And that isn’t just home equity, but other assets as well.

In the year prior to death, households have 70-80% of home equity relative to what they started with just before retirement. Predominantly, among those who are spending down home equity, two-thirds are actually using their housing wealth to pay for a move into assisted living.

Predominantly, of the people who are spending down home equity, two-thirds of them are actually ending up in assisted living, Mayer found.

“We have to recognize that the reluctance to spend down money is not just an issue associated with not trusting reverse mortgages,” he said. “People generally don’t spend down financial assets—period—in the way that economists or other people think they should.”

Home equity hang-ups

Americans own a staggering amount of untapped equity in their homes, but the majority are reluctant to unlock this wealth for retirement spending. Their reasons vary from general misunderstandings about using equity release products such as reverse mortgages, to simply not needing increased cash flow during retirement.

Approximately 78% of adults age 65 and older own their homes, and more than half of this population own their homes outright, according to research presented during the NRMLA conference by Laurie Goodman, co-director of the Housing Finance Policy Center at the Urban Institute.

The net housing wealth of owner-occupied housing is just over $11 trillion, Goodman noted, with those age 65 and older owning a disproportionate amount of it, with $4.3 trillion. Of this total amount held by the 65-plus population, $3.5 trillion is accessible at 85% loan-to-value and $3 trillion is accessible when assuming people can draw up to 75% combined-loan-to-value.

But among all homeowners age 55 and older, 90% report saying they are “not very interested” or “not at all interested” in drawing out home equity, as evidenced by a Fannie Mae survey conducted in the second quarter of 2016.

“Interestingly, those who own their home outright were even less interested in drawing out home equity, that is, those who had more equity to draw out were less interested in doing so than those with a mortgage,” Goodman said.

The biggest concern about tapping into home equity for retirement, for 36% of survey respondents, was they did not want to take on the debt that comes with home equity borrowing. Meanwhile, 30% said they do not need additional money.

Other reasons included the desire to preserve home equity for heirs (19%); save home equity in case of an emergency (10%); and not having enough income (7%) or equity (5%) to qualify for additional debt.

A lack of knowledge about equity extraction products was not the reason for the general disinterest in using housing wealth to supplement retirement. Actually, 49% of all homeowners age 55 and older said they were familiar with reverse mortgages. Despite this familiarity, homeowners were largely distrusting of the product.

Of those who said they were familiar with reverse mortgages, when asked about the biggest concerns they have about these loans, 12% said these products are too costly, while 11% worried that their family wouldn’t be able to stay in the home following the borrower’s death. One-fifth of homeowners even said their biggest concern was “getting scammed.”

Improving reverse mortgage appeal

In the reverse mortgage marketplace, consumers have the option to do HECMs or proprietary reverse mortgage products, whereas in the ‘forward’ equity extraction space borrowers can choose from HELOCs, closed-end second liens, cash-out refinancings, or can sell their home to access equity.

“Certainly, the reluctance to tap home equity is not driven by a shortage of equity extraction mechanisms,” Goodman said.

Apart from consumers’ misunderstandings and general distrust toward reverse mortgages, the Urban Institute recommends several areas where the product could improve to garner make HECMs more appealing to prospective borrowers.

Equity extraction is adversely affected by a mix of structural and behavioral impediments, Goodman noted, not the least of which is the result of a very limited demand from senior consumers who have a strong aversion to debt and a desire to leave a bequest to heirs, or save their home equity in case of emergencies.

“Improving reverse mortgage financial literacy, education and outreach is really the number one thing,” Goodman said. “You want to introduce individuals to reverse mortgages earlier in life via retirement planning.”

High costs of reverse mortgages, relative to forward mortgage products are another obstacle to greater utilization. Even with today’s “ultra-low” rates, annual borrowing costs for reverse mortgages range from about 5.5% to 6.5%, and compounding of interest increases costs even further, Goodman said.

Reintroducing a modified version of the since-discontinued HECM Saver, where borrowers have lower borrowing limits and lower premiums, she suggests, could help incentivize consumers to use the product more flexibly.

Previous research has pointed to lower borrowing costs as one potential solution to increase reverse mortgage take-up among consumers, as well as the need for greater price transparency among lenders.

Creating tools that make it easier for borrowers to compare reverse mortgage rates and encourage them to shop around could improve competition between lenders, and could be an opportunity to increase brand name recognition, especially if an online price marketplace was established and maintained by a federal agency.

“This is the single most important thing that could be done, because it adds legitimacy towards the HECM product and puts it in the public domain,” Goodman said.

Written by Jason Oliva

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  • THIS INDUSTRY needs TRUMPSTER SUPPORT STATEMENT like REAGAN to counter the CONTINUING GOVERNMENT DISEASE we are plagued with now. Nothing else will work until we get it.

    • Warren,

      Nice suggestion but the HECM program has not turned to meet the expectations that Reagan had believed it would. It is NOT self-sustaining.

      Those supporting the President Elect’s new spending proposals will be looking everywhere that losses seem out of control to plug them up or shut them down — whatever it takes….

      • You don’t get it, sir. Trump doesn’t think like you do. Didn’t you notice? He’s into winners. A program that doesn’t profit needs attention — volume, for one — from a better selection of prospects.. Did you notice how he got elected? Lot’s of negatives like you provide, Stand proudly with the winners — bypass the losers. Rise up and slay the dragon — stop finding ways to kill this program, You are part of the problem, sir. Get over yourself. This program needs winners. You don’t appear to be one of them.

      • Warren,

        Volume? You really have no idea how losses are determined in the MMI Fund.

        Winners look to get rid of losers who are DRAGGING their profits down. Ask any FHA single family forward lender what is dragging what. If they are knowledgeable, they have already been complaining to those who represent them in Congress and also HUD about how HECMs keep the forward mortgage MIP too high and are impeding the growth of the profitable FHA forward home loans.

        Your comment shows how weak our industry is in understanding why the MMI Fund is negative. Is it any wonder we encourage HUD to take all of the wrong steps to positive ending balances in the HECM portion of the MMI Fund?

        Enjoy the holidays and if you can stand it, watch the Congressional hearings on the FHA.

  • To get any value from this article, we need to be honest about the current situation of HECMs.

    First, reverse mortgages are NOT getting more popular; a common marketing statement that defies endorsement counts. In fact the HECM endorsement total for October and November 2016 is the lowest endorsement count for the same two month period since 2004.

    Second, the average age of the youngest borrowers for last fiscal year was NOT under 70 and NEVER has reached that low; this has been a common marketing statement promulgated by several reverse mortgage entities.

    Mayer states: ““What this means is that although there are more people coming into retirement, fewer of them are homeowners….” But is that true? This implies that there are more seniors coming into retirement and that the actual number of homeowners is down. What is more likely true based on the article is that the percentage of seniors coming into retirement owning homes is going down.

    Jason states: “The share of retirement age homeowners carrying higher mortgage debt than they possess in financial assets has also grown over the years.” Although this sounds meaningful, it is not. It would be meaningful if we knew that average financial asset total was the same, up, or even down. It would have even more meaning if we knew the average value of the home. The quotation adds no understanding to the trend of the financial situation of new retirees.

    Mayer added something that brings light on the subject: “So not only is mortgage debt growing but, in fact, mortgage debt is outgrowing the amount of savings that people have and this includes 401(k) plans in the financial assets as well….”

    Jason adds: “Americans own a staggering amount of untapped equity in their homes, but the majority are reluctant to unlock this wealth for retirement spending. Their reasons vary from general misunderstandings about using equity release products such as reverse mortgages, to simply not needing increased cash flow during retirement.” But this is more a reflection that most retirees were never taught how to reasonably and rationally decumulate assets in retirement than anything else. Most would rather spend less than run out of cash sources in retirement. They do not seem to understand that they can increase cash flow through a reverse mortgage while not reducing income from other retirement assets.

    HECMs are expensive, it is not their upfront costs alone but rather the compounding of note interest rate and ongoing MIP. For example, a fixed rate HECM with a 5% note interest rate has an actual monthly compound rate of 0.5283% which compounded annually is 6.4322%.

    So if the loan balance on a fixed rate HECM started at $200,000 with $9,000 in upfront costs and a note interest rate of 5%, the APR after 8 years is 6.8287% and the balance due is $329,317, assuming no payments from the borrower. That means to obtain a net of $191,000 in loan proceeds today, one will pay $191,000 in principal and $138,217 in interest, MIP, and upfront costs at termination eight years later. Eight years is being used since that is about the average age of a HECM at termination.

  • Great article. I am trying to qualify for a reverse mortgage, but I am prevented from getting one because I live in an upscale condominium project.

    I have been hearing for some months that HUD was going to permit individual condo owners to get one without the condominium association involvement at all. Ours is not for it, the builder is not pushing it because he does not think more attractive FHA lending rates would increase his sales….so far he is right, As he adds buildings, they sell. We are talking $450K in the Milwaukee area.

    But we are still hopeful that such approval is coming. Does anyone out there have any scuttlebutt on this? Personal approval in our association for individual participation in reverse mortgage seems high, but it is the board that is objecting.

    I would appreciate any comments or email me at [email protected]

    Thank you

    Bob Krowas

  • Hmmmmm, this one is going to take some cogitating on. I see all the comments, which can be as confusing as the article is in in some ways!
    As far as bobo1234’s question, there is talk of changes in this area, however, I have not seen anything affirmative on it yet, has any one else??

    John A. Smaldone

  • There are several interesting points in the article but what is missing is a conclusion that tells us how to use this information to gain more endorsements. This is one problem with group discussions.

    Jason appears to be paraphrasing Ms. Goodman in the following paragraph: “Reintroducing a modified version of the since-discontinued HECM Saver, where borrowers have lower borrowing limits and lower premiums, she suggests, could help incentivize consumers to use the product more flexibly.”

    Since the word “flexibly” is not explained, it is difficult to fully understand the point Ms. Goodman makes. If she means create greater demand, then how?

    While there were at least two highly respected financial planners who seemed to have soured on HECMs with the loss of Savers, it is not so apparent that demand will increase with their reintroduction. The MIP Ms. Goodman seems to be referencing is upfront MIP (FHA Mortgage Insurance Premium). While 0.5% of the MCA [Maximum Claim Amount (lower of appraised value or FHA Lending Limit, now still $625,500 until 1/1/2017)] is significantly higher than 0.01% of the MCA, where is the data showing that demand will increase if the upfront MIP is lowered as suggested? There is a better argument when the upfront first year disbursements exceed 60% of the Principal Limit and the upfront MIP must be increased to 2.5% of the MCA but even then how much increased demand would result?

    As to the PLFs (Principal Limit Factors), the Saver was 52% for a 62 year old at an expected interest rate of 5.06% and for a 2014 HECM at the same expected interest rate, it is 52.4%. The difference is negligible at just 0.4% as it does not fully make up the difference in the higher MIP even at just 0.5%.

    What the article does show is that the cohort nearest to or just over 62 years old have as a percentage fewer homeowners and perhaps on average measurably less equity than older retirees although that is not actually discernible from the data provided in the article.

    So rather than helping us increase demand, this article seems to provide limited explanations as to why demand seems much lower today than in fiscal 2011. But even that is not as clear as one would like.

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