AARP, Researchers Diagnose Reverse Mortgage Problems and Offer Solutions

American research think tank the Brookings Institution hosted an event in Washington, D.C. Monday morning that included a wide-ranging panel discussion of reverse mortgages in America and across the world. The event also included the presentation of two research papers, diagnosing issues and prescribing potential solutions for headwinds faced by reverse mortgage products in the marketplace.

The event, titled “Reverse mortgages: Promise, problems, and proposals for a better market,” was held in conjunction with the Kellogg School of Management based at Northwestern University in Evanston, Ill. and was part of a larger, ongoing series of meetings hosted by Brookings dedicated to retirement policy reform spearheaded by both Brookings and Northwestern’s Kellogg school.

The event led off with a keynote speech from Debra Whitman, EVP and chief public policy officer at AARP. While primarily discussing ongoing issues facing older Americans in terms of difficulties related to adequately saving for retirement, Whitman did provide some context for AARP’s position on reverse mortgage products in general.

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“At AARP we do not see home equity or reverse mortgages as a major solution for all people for the retirement security problem,” Whitman said in her keynote. “In our view, even transparent, well-designed reverse mortgages can only play a limited role in improving the financial outlook for the majority of people.”

Citing the median home equity value in 2016 of $145,000, Whitman argued that outside of major metropolitan areas that have much higher property values, most people will not be able to ensure retirement security for the full length of their increasingly longer retirement terms by employing home equity products like reverse mortgages, while also stating that reverse mortgage foreclosures are “too high.” She did, however, also say that reverse mortgages can work for some people in specific situations.

New reverse mortgage research papers

On the same day the event took place, researchers presented on two of three newly-published research papers diagnosing issues with reverse mortgage products, along with offering some possible solutions to specifically-identified problems. The first presenter, Dr. Stephanie Moulton of Ohio State University, described that the low-utilization rate of reverse mortgages can be improved by streamlining product options that target consumer segments with demonstrated demand for home equity borrowing.

“The challenge put forward to us by Brookings [was to ask] how we can reform reverse mortgages to make the market better,” Moulton said.

Since equity in the home is often a primary source of wealth for many American households, home equity can serve as a viable source of supplemental income for the nation’s seniors, she said. To that end, and in a potential effort to increase the utilization rate of reverse mortgages for older Americans, Moulton and co-author Donald Haurin (also of Ohio State) made two recommendations for additional reverse mortgage product offerings.

The first is small-dollar reverse mortgages, a low-cost option that can target 6.1 million homeowners for whom home equity is a primary retirement asset, and who can benefit from access to short-term liquidity. The second is streamlined forward-to-reverse mortgage conversions that can target over 3 million older homeowners who still have a forward mortgage, and could significantly improve housing affordability through the elimination of a monthly forward mortgage payment, the authors write.

Moulton and Haurin added that streamlining reforms for both the origination and servicing of reverse mortgages are necessary, which can decrease the likelihood of a loan terminating in foreclosure. Front-end proposed reforms include risk-based underwriting that takes into account borrowers’ credit scores and draw amounts, while back-end reform proposals include preventative servicing and proactive steps by both servicers and the Federal Housing Administration (FHA) to enhance collateral property values for properties owned by reverse mortgage borrowers.

The second presented paper is by Professor Thomas Davidoff from the University of British Columbia, and proposes that reverse mortgages can be made more attractive to borrowers and lenders by increasing loan amounts at origination to purchase a life annuity. The annuity, Davidoff contends, can be used to pay down principal and interest on the loan while borrowers can remain in their homes. This can serve to transfer loan balances from long after origination – when the home is likely to be worth less than the outstanding balance – to earlier dates when the home is more likely to be worth more than the borrowers owe.

“Numerical examples show that the costs to lenders of limited liability may be significantly reduced by this smoothing of the loan balance across time,” Davidoff writes. “Lenders may thus be able to provide more cash to borrowers at loan origination while offering lower fees and interest rates.”

Panel discussion

The paper presentations were followed by a panel discussion moderated by Northwestern University’s Benjamin Harris, and included Moulton and Davidoff, along with Dr. Christopher Mayer from Columbia University and Longbridge Financial, as well as Dr. Laurie Goodman, vice president of housing finance policy at the Urban Institute.

Goodman began the discussion by lauding the solution proposed in Moulton’s paper.

“I love Stephanie’s proposal,” Goodman said. “She makes a lot of common-sense recommendations to increase the reach of the reverse mortgage product, and not only does she make these recommendations, but she also sizes the use of it. She recognizes the fact that the reverse mortgage program is not for everyone, but that there are two specific uses that are very, very common: small-dollar HECMs and forward mortgage HECMs. Both make a ton of sense. […] I wholeheartedly endorse the paper.”

From both the academic and industry perspective, Mayer largely echoed Goodman’s sentiments regarding Moulton’s proposal, but qualified that her proposal has a particular focus on the low-to-moderate income market, a market he says would have “a hard time existing absent [of] the government.”

Mayer also described that the United Kingdom has a reverse mortgage market that is six to seven times larger per capita than the market in the United States.

“The major insight in the U.K. that I think would be helpful for us to understand is that a 30-year fixed-rate or a long-term mortgage with payments for somebody in their 50s or 60s — that they’re going to be paying for another 30 years without a pension system — is not clearly an appropriate product for many people,” Mayer said. “And it puts them in a situation where they’re making payments in retirement that they’ll then have to struggle with.”

A way of creating a product that serves those people where payments are made for a period of time before rolling into a reverse mortgage and eliminating the need for payments is something that has a lot of potential in the U.S., and that being a driving factor in the U.K. could serve as proof of that. However, the logistics will likely take work to ultimately serve as a viable solution, he said.

As for Davidoff’s proposed solution, Goodman called it “incredibly clever.” Mayer characterized Davidoff’s proposal by saying that his idea, in practice, is actually happening at the pool level on the private-label side of the industry.

“I think the idea that Tom is talking about makes a lot of sense, and it’s something that people who are looking at financing these things are doing today in some variation of the approach,” Mayer said.

‘Incredibly complex,’ questions and answers

Injecting some commentary into the discussion, moderator Harris interjected that in general, he finds that topics pertaining to reverse mortgages are “incredibly complex,” comparing them to his general studies on tax issues in his position at the Kellogg School.

“Reverse mortgages blow taxes away on complexity,” Harris said. “Both the details of particular loans, how the programs work, [and] the reforms that have happened. […] This is a program that is transforming before our very eyes almost every year. I find it very confusing, and that’s before you even get to the economics. This is an incredibly complex issue, so maybe we should just acknowledge that from the get-go.”

Complexity was a consistent hallmark of the continuing discussion, with Goodman raising issues related to restrictions on financial planners under the Real Estate Settlement Procedures Act (RESPA) that prohibits financial advisors from being compensated if choosing to recommend a reverse mortgage.

Moulton also discussed complexities that can arise from HECMs originated before a number of program reforms were enacted, while still addressing product options for seniors that don’t penalize future reverse mortgage borrowers. Addressing fiscal concerns related to the program’s cost to taxpayers was front-of-mind for researchers in trying to think of their presented proposals. She also discussed challenges related to characterizing reverse mortgage foreclosures, since many of the loans naturally end in foreclosures that do not result in actual displacements, since a foreclosure primarily occurs when a reverse mortgage borrower either dies or leaves the home.

The primary panel discussion was followed by a Q&A period. The first question was framed around the complexity issue, with an audience member describing not just an “asymmetry of information, but an asymmetry of cognition” that makes seniors particularly vulnerable to not understanding the reverse mortgage product. Moulton and Goodman agreed with the question’s premise, emphasizing that a need does exist to simplify the product offerings — which was an idea Goodman expressed last month when testifying in front of the House of Representatives Financial Services Subcommittee on Housing, Community Development, and Insurance.

Full transcript and video of the event will be made available later this week on its dedicated page, according to a media spokesperson for the Brookings Institution.

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  • As to HECMs in the MMIF, the real problem currently is not US taxpayers footing the losses but rather FHA’s single family forward mortgage programs footing the bill. As usual the dreamers do not seem to realize that as constructed, HECM losses in the MMIF must first exceed the culminative gains in the forward programs also in the MMIF before taxpayers are on the hook for the HECM losses in the MMIF. Right now there are more than sufficient gains from forward mortgage gains to offset HECM losses. Yet is that fair to forward borrowers that they pay more MIP than required to carry the HECMs endorsed after 9/30/2008? Where was Laurie Goodman’s voice in that discussion? She has for several years pointed out this basic inequity to FHA forward mortgage borrowers.

    Then there is the suggestion that servicers and FHA work to “enhance” the value of the collateral at the back end; yet who is paying those costs? Where will the increased value go? If it is to borrowers or heirs and not FHA that just sounds like a government give away with no authorization from Congress.

    What was interesting from the article is no one discussed how any change will turn around the HECM losses in the MMIF. For example, HUD, not the independent actuaries, predicted that the 48,359 HECMs endorsed in fiscal 2018 will have a net negative present value from future cash flows of $1.5 billion or an average loss per endorsement during fiscal 2018 of almost $32,000. There is nothing in the article that shows how any of the proposals would have reduced that projection for the HECMs endorsed in fiscal 2018. Why?

    We all can come up with great ideas for HECMs or any other reverse mortgage product if we do not have to be fiscally responsible. Until late spring 2009, HUD argued based on unrealistic assumptions that the insurance portion of the HECM program was self sustaining. On 9/30/2018 HUD told us that the HECMs endorsed since 9/30/2008 will result in $15.7 billion in negative cash flow. No one has any idea how much the HECMs endorsed before 10/1/2008 will ultimately cost taxpayers. Taxpayers pay for those HECM losses because they are found in the G&SRI Fund not the MMI Fund.

    If these ideas are so great, why aren’t private lenders jumping for the chance to sponsor them? While I will read the proposals, they sound a lot like great tax proposals, just more ways to grow deficit spending. It is great when one can talk about benefits and improvements to those benefits without being the least bit bothered about how they will be paid for. After all it is not the Baby Boomers who are likely to be burdened with these costs but their children, grand children, and great grand children.

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