10% of Older Homeowners Could Benefit from HECMs, Other Equity Loans

About 10% of the homeowners aged 65 and older would benefit from the use of home equity extraction tools, according to a new study from the Urban Institute — but major structural and institutional barriers remain.

Researchers Laurie Goodman, Karan Kaul, and Jun Zhu explored the untapped market for reverse mortgages and other home equity conversion products, analyzing the relationship between equity and liquid net worth. For a large swath of older Americans — specifically those with more than $100,000 in home equity but $50,000 or less in liquid net worth — converting that equity into cash represents a significant retirement strategy.

“This report shows that millions of U.S. households lack adequate income and savings, but possess a significant amount of home equity wealth,” the researchers wrote in the study, which was funded by Finance of America Reverse and used data from the Federal Reserve’s 2016 Survey of Consumer Finances. “For these households, liquefying a portion of their home equity by converting it into cash could allow them to pay back debt to eliminate or reduce monthly debt payment burden, or boost household income.”

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The benefit is particularly significant for older Americans of color. Home equity represents a vastly larger percentage of black and Hispanic homeowners’ overall net worth; for instance, median non-home asset wealth for black Americans sits at just 5% of what the median white homeowner has. For Hispanic homeowners, that number sits at 2%.

“Black and Hispanic senior households are disproportionately more likely than white senior households to deplete savings sooner, and may need to tap into home equity,” the team wrote.

But as professionals in the Home Equity Conversion Mortgage space are likely to know already, the researchers also found that use of equity-release products has been low. Citing numbers from the University of Michigan’s Health and Retirement Study, the Urban Institute notes that in 2014, just 0.9% of homeowners and 65 and older had a reverse mortgage; by comparison, 1.8% had sold their homes to tap equity, 1.4% used a cash-out refinance, and 11.4% had an active home equity loan, second mortgage, or line of credit.

Echoing a report Kaul and Goodman released earlier this year through the Urban Institute, the team included a laundry list of reasons why seniors might be afraid of using home equity in retirement.

“Impediments to extracting home equity can be attributed to factors that include an aversion to debt and a general desire to stay financially conservative, a desire to leave a bequest or save for emergencies, fear of losing the home, product complexity, high costs, and fear of misinformation and fraud directed at the elderly,” they wrote.

Still, the group pointed to positive demographic trends, with the aging population creating volume almost by default.

“Even if we assume that future home equity extraction rates will remain at today’s low levels, the aging of the population alone will expand this market,” they wrote.

Additionally, the rising number of older Americans with first mortgages could provide an opportunity for HECM and other lenders.

“Many households carrying mortgage debt into retirement will likely not be able to afford monthly payments, and could access liquidity and smoothen consumption with a reverse mortgage,” the team said.

Check out the full report at the Urban Institute.

Written by Alex Spanko

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  • Enough with the Baby Boomers coming to save the day.

    It has not happened in almost a decade of Baby Boomers turning 62 (at the current rate of over 4 million a year). Fiscal 2009 was the best year for endorsements ever but the total endorsements for fiscal 2009 was less than 3% higher than fiscal 2008. Following that were three consecutive years of outrageous losses in the number of endorsements and today we sit in the quagmire of secular stagnation and somehow the growing senior population will raise all ships? It is not like the contributors do not have any knowledge of our market or the senior population.

    According to the Census Bureau, there are 74.1 million Baby Boomers living in the US in 2016. That is 22.9% of the US population. See

    http://www.cleveland.com/datacentral/index.ssf/2017/04/baby_boomers_slip_to_741_milli.html

    Approximately 4.1 million Baby Boomers will turn 62 in the US in 2017. See

    https://knoema.com/egyydzc/us-population-by-age-and-generation

    By the end of the article above, the picture becomes of a product that will principally have demand because it is the mortgage of last resort. Hardly the stuff we would have hoped to be aspiring to at the start of fiscal year 2018.

    And EricSD thinks I am negative? EricSD, just read the article above.

  • I’m relatively new to the Reverse industry but these numbers are not looking good. Based on previous principal limit factors and the article above, we could bet on 4M eligible baby boomers coming online every year and about .9% of those will get a reverse mortgage. (4M x .009% = 36,000 new reverse mortgages per annum). We could also count on roughly another 10,000 of Hecm-to-Hecm refi volume. Now due to the new principal limit factors, I calculate at minimum 30% of my previous clients would no longer qualify for a reverse mortgage (36,000 x .70% = 25,200). So now we are looking at about 25,200 new reverse mortgages per year going forward. The Hecm-to-Hecm market has been virtually eliminated with the new changes. So now we are looking at about half the origination volume of last year which will increase the cost of new reverse mortgage acquisition significantly as we have the same number of brokers and loan officers going for half the deals. To make matters worse for brokers, the revenue per deal is about half of what it was before. This is a squeeze on both ends for brokers who needed the higher commission structure due to the long sales cycle of the transaction and higher cost of acquisition. Someone tell me my math is wrong and that I’m in left field…..please. It’s getting increasingly difficult to justify a big marketing investment into this niche.

    • Ivan H,

      EricSD was giving me a hard time about being negative just because I view the next few years as still challenged by the current pattern of secular stagnation. Your numbers make mine look like I was one of the ultra optimistic sales managers in the industry.

      As to endorsements for the next three months, you are definitely wrong. The case number assignments for July and August were too good for them to be as low as last year. No doubt the case number assignments in September are even better.

      You forgot about H4P. While it is small there will most likely be 2,000 or more from that source. HECMs are still useful in financial planning. I have no evidence what that is of the market. On the other hand, anecdote seems to persuade that a few do well with that source and others far less. Most who do well seem to be appealing to asset management practices, but less so to CFPs, CPAs, and RIAs.

      I am expecting to see endorsements between 44,000 (current pattern of secular stagnation) and 50,000 by way of estimates from John Lunde for the last seven to eight months of this fiscal and my glowing outlook for the first four to five months of this fiscal year.

      Even if I am right but your local market dries up, you are the one who gets injured for overspending on marketing, not me. Be careful about over focusing on national trends. Your market could be very different.

      Have a great year.

    • One possibility on the bright side is that rising home values, supported by a strong growth-economy will raise the equity of current homeowners and therefore their eligibility for the HECM program.

      2009 was the high-point of origination volume, and then the financial crisis stopped that growth trend in its tracks. The benefit of the economic recovery bringing restored home-value hasn’t manifested yet. It should help with refi-HECM volume at least; cut-down on “churning.”

      This economic-change factor is one that I haven’t seen addressed. A lot of calculations/opinions with regard to the effect of the Financial Assessment and Value to Loan Ratio (& insurance. premiums) is going on. But what about calculating the near-future, increased eligibility due to the recent/stable, rise in home values that’s been going on.

      And, how will the new federal tax legislation affect the HECM program? There doesn’t seem to be a “plum” for seniors in this coming tax plan. Will it create more interest in Reverse Mortgages?

      • Ed,

        Please give us some insight on how more equity will result in more originations. Why do you suggest that the proposed legislation will produce greater interest in HECMs? That’s like the tail wagging the dog.

        Will a strong growth economy ultimately bring more HECM originations? It would be great if you could historically demonstrate that especially in the last decade.

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