Reverse Mortgages Contributing to Denver Housing Squeeze

The consistently strong reverse mortgage origination numbers from the Denver metropolitan area could have a related dark side for first-time homebuyers.

Citing a recent LendingTree study that showed Denver had the second-highest reverse mortgage usage among borrowers aged 60 and over, the Denver Business Journal speculated that demand for Home Equity Conversion Mortgages could be contributing to the city’s low inventory of available properties for sale.

Tendayi Kapfidze, chief economist at LendingTree, told the DBJ that high rates of HECM usage affect housing crunches in cities — and nationwide.

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“Nationally, inventory is tight,” Kapfidze told the publication, adding that other research has shown a general trend toward people remaining in their hometowns and properties rather than moving.

The most recent market report from the Denver Metro Association of Realtors revealed a record-low 3,869 homes for sale, according to the DBJ. That bottleneck has been blamed on increasing demand for housing in the Colorado capital, as well as a lack of new construction — and a dearth of affordable options for older folks who might be considering downsizing.

At the same time, Colorado and other states in the West have seen skyrocketing levels of home equity. Centennial State homeowners gained $22,000 in equity during the four quarters ended 3Q 2017, according to the most recent data from real estate analysis firm CoreLogic. That figure places Colorado well above the the national average of $14,900.

Those states have also been reliable hotspots for reverse mortgage originations based on data from Reverse Market Insight. For instance, Colorado saw a 68% jump in originations in 2017 as compared to the prior year, leading all states.

All that positive news for HECM lenders could spell trouble for first-time homebuyers hoping for more properties to become available for sale.

“As more baby boomers get to retirement, there might be an increase in use of reverse mortgages,” Kapfidze told the DBJ.

Written by Alex Spanko

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  • Now reverse mortgages are being blamed for a lack of homes for first time home buyers, really? While it is true that a community with a low home inventory volume in comparison to demand feels that any source for lack of supply is a problem, most communities outside of Colorado do not have much to worry about from an over origination of HECMs in their communities in the next few years. I know LA does not.

  • This beats them all on the books! Now we are the dark horse that is making it difficult for the first time home buyer to be able to buy a home.

    Just think, the HECM is causing a housing shortage, now that makes a lot of sense.

    They don’t talk about the senior who has a better quality of life because of the HECM! It does not talk about the HECM being the program that is allowing a senior to downsize into a more affordable and home sized to fit their present day needs.

    It does not say because of the HECM, Mr. and Mrs. Borrower just received a big increase in their monthly income because they have no more mortgage payment!

    I can go on and on about the benefits the HECM can and is doing for a community like Denver, Colorado but I will not!

    I side along with my friend Jim Veale, “Now reverse mortgages are being blamed for a lack of homes for the first time home buyer”

    Jim, I am hearing it all now, wow, things have changed! Hey, a reverse mortgage is still the greatest and can do a great deal of good out there! I still get the feeling of being a missionary every time I see a senior cry because of the good we have done for him and his spouse, don’t you?

    John A. Smaldone
    http://www.hanover-financial.com

    • John,

      If a newspaper ad said that paying off a forward mortgage with a HECM produces more income for the borrower, I would lead the attack on that article.

      There is far too much loose talk about income. When a forward mortgage is paid off, cash outflow of the borrower will generally decrease, thus increasing cash flow. What we fail to say in most cases is that the cash flow increase is temporary. (Cash flow is the net result of subtracting cash outflow from cash inflow)

      For example, if the borrower has monthly income of say $2,000 which is also her only source of cash inflow but has $2,500 in cash outflow per month (last month her stepped payment mortgage rose to $900 from $325 per month). This means the borrower is now running $500 per month behind in cash flow. In the close of her HECM, the existing mortgage is paid off. What happens to her monthly cash flow?

      1. This section covers why a decrease in mortgage payments is NOT an increase in income.

      The HECM payoff of the mortgage results in the elimination of the mortgage payment so that the borrower sees her total cash outflow per month drop to $1,600 and with income (and cash in flow in this case) of $2,000, her cash flow immediately becomes a positive $400 per month, which is a $900 increase in cash flow from the $500 per month in negative cash flow she had in the month before she got the HECM.

      BUT if the mortgage payment elimination were income then her monthly income would increase by $900 to $2,900 per month but the cash outflow would only be $1,600 since there is no longer a $900 mortgage payment so that the cash flow would become $1,300 ($2,900 in cash inflow minus $1,600 in cash outflow). But we know that the cash flow can only go up $900 (from a negative $500 per month to a positive $400 per month) when all that is changed is the elimination of a $900 mortgage payment per month.

      2. This section covers why the elimination of the mortgage payment increases cash flow but in the vast majority of cases, just temporarily.

      Let us say the remaining payments were just for four years and that her multimillionaire brother loans her what she needs to make those payments. Say there is no inflation, so that at the end of those four years, her monthly cash flow would go from a negative $500 (before the cash inflow from borrowings from her brother) to a positive $400 (without any cash inflow from borrowings from her brother).

      So, in conclusion, mortgage payment reduction decreases cash outflow and thus increases cash flow but does not and cannot increase income. For most, it is a temporary cure since over time the problem would have fixed itself through a total payoff of the debt. But many seniors in this situation cannot financially survive the remaining scheduled payment period without a HECM or a multimillionaire brother who is willing to step and help (the combination of both is RARE).

      Take care,

      John

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