Urban Institute Study: Why Aren’t Seniors Getting Reverse Mortgages?

A new report from the Urban Institute claims that Americans aged 65 or older are reluctant to tap into their staggering amount of collective home equity, and a fear of reverse mortgages is part of the problem.

Two researchers working under the auspices of the Washington, D.C. think tank — Karan Kaul and Laurie Goodman — take a deep dive into the problems and potential solutions in a report released this week. The pair first lays out the massive amounts of equity available to older Americans: Adults aged 65 and older control $4.4 trillion of the $11 trillion in total equity held by American homeowners; after adjusting for mortgage limits and other variables, Kaul and Goodman determine that these Americans could potentially access up to $3.6 trillion of it in their retirement.

But a galaxy of factors stops them, including a desire to leave a legacy to children, a general avoidance of debt, and a deep misunderstanding of how home equity conversion mortgages and other equity-extracting products work. Kaul and Goodman cite data from Fannie Mae’s 2016 National Housing Survey, which found that only 49% of homeowners aged 55 or older said they were familiar with reverse mortgages; of those, 20% cited fraud as their top concern when considering a HECM.

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Mistrust of reverse mortgages is nothing new, but Kaul and Goodman say that the departure of name-brand mortgage lenders from the marketplace — including Wells Fargo, Bank of America, and MetLife — exacerbated the problem, as consumers concerned about scams would generally feel more comfortable working with companies with which they’re familiar. In addition, smaller originators benefited from the “free rider” effect created by the ad campaigns and educational materials that the major players produced; in their absence, the researchers write, potential borrowers have become more susceptible to misinformation.

Kaul and Goodman have multiple suggestions for making reverse mortgages more attractive to consumers, from lowering origination and insurance fees to increasing awareness by including information about HECMs in Social Security literature to requiring counseling even earlier in the process.

“An ancillary but crucial benefit is that the more informed future retirees are about reverse mortgages, the less inviting this space would be for scammers and fraudsters,” they write.

While these plans focus primarily on the marketing of reverse mortgages, Kaul and Goodman also recommend major structural changes to the HECM program itself. They assert that the wide variety of reverse-mortage options constitutes an obstacle to general understanding, and thus suggest that HUD streamline the program by eliminating the tenure annuity option — which only 1.6% of borrowers took in 2015 — and instituting a term limit on HECM lines of credit, with a draw period and a repayment period. The latter strategy would bring HECMs in line with home equity lines of credit, and also allow lenders to lower costs, as they would no longer have to hedge against the risk that borrowers may take large draws at unpredictable times over the entire life of the loan.

No matter the actual solution, Kaul and Goodman’s findings lay bare the challenges facing reverse mortgage originators and other financial professionals in the industry: The National Housing Survey data they cite predictably proves that most Americans want to remain in their homes in retirement and have no interest in downsizing, but simultaneously remain afraid of HECMs and other equity-extracting options.

Written by Alex Spanko