Reverse mortgage products represent the least popular option of extracting home equity compared with three alternative methods, including open-ended Home Equity Lines of Credit (HELOCs), cash-out refinance mortgages, and closed-end home equity loans. Reverse mortgage use can also vary significantly based on race and ethnicity due to a number of different factors.
This is according to newly-released data shared by researchers Karan Kaul, Sarah Strochak and Laurie Goodman of the Urban Institute.
“At a time when seniors are sitting on a mountain of housing wealth and have anxiety about their finances, this should be a well-used program,” the researchers write. “Instead, despite rising senior population, participation [in the reverse mortgage market] decreased between 2011 and 2018, from 73,112 to 33,000 mortgages.”
Reverse mortgages: least popular home equity extraction option
Based on 2018 data released under the Home Mortgage Disclosure Act (HMDA), four home equity tapping methods are listed by Urban in order of their popularity. Most popular is an open-ended HELOC since in 2018, 1.12 million of these were originated. Second most popular is a cash-out refinance mortgage featuring a loan amount larger than the outstanding balance of the original loan. Approximately 1.09 million of these were originated in 2018.
The third most popular option is a closed-end home equity loan or closed-end second, in which a borrower pays back a fixed loan amount through monthly installments. While themselves far less popular than either open-ended HELOCs or cash-out refinances, HMDA data still indicates that approximately 296,000 closed-end seconds were originated in 2018.
Finally, the least popular option based on the data is reverse mortgages, with only roughly 33,000 of these having been issued in 2018.
“This represents only 1.3% of the combined 2.5 million loans homeowners took out to extract equity in 2018 across all four products,” the Urban researchers write.
When asked what may be the cause for such a low use figure for reverse mortgages among other home equity extraction options, a lot of the more primary reasons may rest in issues that will be very familiar to the reverse mortgage industry: product complexity and educational/reputational hurdles. This is according to Karan Kaul, research associate with the Urban Institute in an interview with RMD.
“There are a bunch of reasons [for low use levels of reverse mortgages],” Kaul said. “Some of it has to just do with the complexity of the product and that it can be really hard to wrap your head around. And some of that has to do with just the product design and all the optionality. And then, there’s also the issue with reputational risk, the fear of losing your home, getting scammed, [we’ve seen] ample history of that. So, you put all of that together, it just doesn’t bode well for reverse mortgage usage.”
In general, however, seniors are also generally unwilling to employ the use of the equity in their homes in order to make ends meet regardless of the options available, Kaul said.
“The more fundamental issue here applies to all products that allow borrowers to extract equity, which is that seniors simply don’t have a desire to extract the equity out of their homes,” he said. “Whether it’s a reverse mortgage or a home equity loan, or cash-out refinance, they just are not showing any meaningful desire to liquefy the equity in their home. And, that may be because they don’t want to take on debt in their 60s, 70s and 80s. They may want to leave a bequest, or they may just be trying to stay financially conservative.”
Reverse mortgage use between races, ethnicities
Among the findings released by the Urban Institute include a look at the use patterns of reverse mortgage products based by borrowers’ race and ethnicity, and an interesting picture emerges concerning how different groups employ the use of a reverse mortgage product.
For instance, while black and white Americans make up a larger share of reverse mortgage lending when compared with traditional, forward home equity lending, Asian and Hispanic Americans generally make up a greater share of traditional equity lending than they do of reverse mortgages.
“White and black Americans constitute a greater share of the 33,000 reverse mortgage loans than they do of cash-out refinances, HELOCs, and closed-end seconds,” the researchers write. White borrowers took out 77.7% of all reverse mortgages in 2018, and black borrowers took out 7.2%, for a combined share of 84.9%.”
On the forward equity lending side, Asian and Hispanic borrowers generally make up a larger percentage of forward equity than of reverse mortgage lending.
“Asian borrowers made up just 1.7% of reverse mortgages, compared with 5.7% of HELOCs, 3.2% of closed-end seconds, and 4.1% of cash-out refinances,” the researchers write. “Hispanic borrowers made up 5.8% of reverse mortgages, compared with 5.6% of HELOCs, 10.4% of closed-end seconds, and 9.3% of cash-out refinances.”
Specifically among reverse borrowers, Hispanics tend to have generally higher property values when directly compared to their white counterparts in 2018, with the median home value among Hispanic reverse mortgage borrowers standing that year at $365,000. This is compared with $305,000 for white reverse mortgage borrowers in the same period of time, according to the researchers.
Interestingly, black reverse mortgage borrowers also tend to delay the employment of a reverse mortgage until later in life compared with other groups, the researchers say.
“[W]hen they turn 74, black borrowers begin to tap into reverse mortgages at higher rates: 49% of black reverse mortgage borrowers in 2018 were older than 74, compared with just 42–43% of white, Hispanic, and Asian borrowers,” the researchers explain. “Black homeowners’ delayed use of reverse mortgages likely reflects a much slower pace of home equity accumulation relative to other racial and ethnic groups, as seen in data from the Federal Reserve’s 2016 Survey of Consumer Finances.”
Opportunities for proprietary reverse mortgages
The HMDA data reviewed by the researchers at the Urban Institute consisted of information related to HECM loans. However, the low rate of use coupled with the different use patterns could serve as an indicator for how lenders form future reverse mortgage products without the involvement of the federal government or the HECM program, Kaul said.
“I don’t think there’s any specific recommendation for the industry as far as HECMs, but maybe there is an opportunity for the industry to really think about figuring out a way to make proprietary reverse mortgages come back,” he said. “Maybe come up with products that solve some of the issues we’re seeing with HECMs. Whether it’s complexity, whether it’s pricing or something else. That may be an opportunity for the industry to step in and [determine] a way to stop some of these issues, and come up with a new design for a proprietary product.”
Proprietary reverse mortgage products are becoming a focus of great optimism for the reverse mortgage industry, with lenders introducing a number of new product variations in recent years in light of reduced HECM volume.
What can be learned from the data
Among some of the takeaways from this data, Urban Institute researchers paint a broad picture concerning how the popularity of reverse mortgages relative to other home equity tapping options may inform the use of the products by different subsets of the senior demographic, based on age, race and ethnicity.
Because of these variations, care must be taken to frame any new changes to the Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) program in such a way that it does not create a disparate impact for any one group, according to the researchers.
“In response to losses on bubble-era HECM loans, the FHA has made several changes to tighten HECM eligibility requirements, such as reduced borrowing limits, enhanced appraisal requirements, and premium changes,” the researchers write. “While we don’t have historical HMDA data on reverse mortgages, these changes could have had a disproportionate impact by race/ethnicity.”
Because there is such visible variation concerning the ways that different groups employ a HECM and at which points in their lives they choose to do so, this should be taken into account when determining how to frame reverse mortgage products and its government-sanctioned program in the future.
“The new HMDA data show substantial variation in reverse mortgage use, not just between white borrowers and other racial and ethnic groups but also between nonwhite groups,” the Urban researchers write. “Whether driven by location, borrower equity, preference, or other reasons, these differences leave us with one important takeaway: future changes to the HECM program must consider any potential for disproportionate impact by race or ethnicity.”
However, it’s difficult to think of potential program changes that have the intent of minimizing disparate effects on racial or ethnic groups if policy-makers don’t also focus on the issues that motivate a necessity for change, Kaul said.
“That is, unless you’re trying to make changes to the program where your vision for it is to improve reverse mortgage usage among certain racial and ethnic groups,” he said. “Then that will be a place where you’d want to start. So, it all comes down to what is it that you really want a program to look like, and then you drill down from there.”
Read the report at the Urban Institute.