Newport Beach, Calif.-based alternative equity tapping company QuantmRE has launched a $1.07 million financing campaign through a crowd-funding platform, and has taken aim at a demographic of potential customers that normally interact with the reverse mortgage product category. This is based on an interview with QuantmRE CEO Matthew Sullivan conducted by RMD.
Part of the focus on the reverse mortgage demographic stems from reasons related to a generally low percentage of market penetration found by the reverse mortgage product category, which Sullivan sees as creating opportunity for alternative equity tapping methods that are not debt-based.
Coupling that with seniors’ general conservatism in financial matters and a reduction in the amount of HECM endorsements between the early and late 2010s has encouraged the company to explore the expansion of tapping options for American seniors.
Low HECM program participation
One of the major reasons that QuantmRE intends to use its new financing to focus on the reverse mortgage demographic centers on generally low levels of utilization associated with the Federal Housing Administration’s (FHAs) Home Equity Conversion Mortgage (HECM) program, Sullivan says. The fact that the senior population is rising while HECM endorsements have been going down presents a market opportunity for alternatives, he says, basing his perspectives on early 2020 research conducted by 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 Urban research says. “Instead, despite rising senior population, participation decreased between 2011 and 2018, from 73,112 to 33,000 mortgages.”
The data from the Urban Institute compared reverse mortgage utilization to other forms of home equity extraction, indicating that in comparison with other options, reverse mortgages were generally less popular among seniors in the recorded period between 2011 and 2018.
Getting to the heart of why seniors are reluctant to get reverse mortgages has been illuminating for QuantmRE, with many seniors reporting a general aversion to taking on additional debt late in life, while others may face certain structural impediments to home equity borrowing, Sullivan says. However, the most important factor in the larger equation is a lack of demand.
According to data from the Federal Reserve, the four most popular equity tapping options among seniors are a home equity line of credit (HELOC); closed-end second mortgages; cash-out refinances; and reverse mortgages. Even when all four of those products are combined, participation in them among seniors is collectively low, Sullivan says.
“None of the four channels had an annual origination rate greater than 4% in any year between 2004 and 2012, and only HELOCs had a rate exceeding 1%,” Sullivan says, citing the Federal Reserve data.
Seniors’ changing financial landscape
As the population of seniors has increased, two potential causes for a lack of participation in home equity extraction has emerged, Sullivan says: seniors’ general financial conservatism and desire to avoid taking on more debt or to leave their home as a bequest asset. They may also have concerns about losing their home in an arrangement where it is the liened asset in something like a reverse mortgage, he says.
Seniors are also living longer, and have more options to work later in life, which can reduce the necessity to tap the home’s equity if income is not fixed, he says. There is also potentially more to it, he adds.
“Beyond these behavioral factors, structural impediments to equity extraction are also at play, including poor financial literacy, the complexity and high costs of some mortgage products, and fear of misinformation and fraud, particularly with reverse mortgages,” he says. “Post-crisis credit tightening has also affected home equity lending.”
While these causes are all varied, the end result of each scenario is an enormous repository of untapped housing wealth. Collective housing wealth for seniors recently reached $7.54 trillion in Q1 2020, according to Reverse Mortgage Market Index (RMMI) data from the National Reverse Mortgage Lenders Association (NRMLA) in conjunction with data analytics firm RiskSpan.
Like the reverse mortgage industry, the alternative equity tapping offerings often encounter similar educational hurdles that limit the market penetration of the products. Even in comparison with little-used options like a reverse mortgage, however, alternative equity tapping companies are even less understood among potential customers, Sullivan says.
“Most homeowners are familiar with the traditional debt-based ways of unlocking their equity – for example an additional mortgage, a home equity line of credit, or a reverse mortgage,” he says. “The characteristics of these products are also understood – for example homeowners understand the concepts of duration, interest rates, monthly payments, and the risks and potential foreclosure implications to a homeowner that are associated with non-payment of sums due to the lender.”
In most cases, they also understand that each product comes with strict qualification requirements. At the end of the day, this can translate into some alternative equity tapping customers standing as seniors who sought to get a reverse mortgage but who did not qualify for one.
“Many of our potential customers have been turned down for loans as they did not meet the income, credit score or DTI requirements,” Sullivan says.
Similarly to a product like a reverse mortgage, the home equity agreement product offered by QuantmRE and other companies in the space can offer the same outcome: a lump-sum cash offering that utilizes a customer’s home equity.
“Our challenge is to explain how it is possible for us to provide this lump sum without the additional burden that comes with a debt-based product – in other words, how can it be that a homeowner can get a cash sum, but does not have to pay interest, make any monthly payments and does not take on additional debt,” Sullivan explains.
‘Substantial latent demand’
All of these elements combine into reasons why QuantmRE intends to use any new capital generated by its crowd-funding to pursue new business in demographics that are traditionally sought after by the reverse mortgage industry, Sullivan says.
“We intend to use a substantial portion of the capital raised under our current crowdfunding campaign to expand our direct-to-consumer and channel marketing strategies so that we can educate, inform and engage a much wider segment of the reverse mortgage demographic that clearly wants and needs to access some of the equity in their homes,” Sullivan says.
As the number of seniors in the U.S. continues to rise and issues related to retirement financing linger and potentially expand, turning to the home to create additional cash flow may become a more viable option for a growing number of people, and Sullivan’s company, and others like it are aiming to be ready by providing additional options.
“We believe there is substantial latent demand for homeowners in this demographic who wish to take advantage of our Home Equity Agreements,” he says. “[Our agreements can] enable them to unlock the cash that is trapped in their equity in a way that addresses all of the objections that recent research has identified, providing a viable alternative to homeowners to address the demand that is significantly underserved by the debt-based options that are currently available.”
Sullivan and representatives from other alternative equity tapping companies related to RMD earlier this year that they have seen additional demand stemming from the financial stress caused by the COVID-19 coronavirus pandemic. Even though they are technically competitors, Sullivan previously explained that there could be partnerships with reverse mortgage companies who wish to find the best possible solution for a client.
“We have an active channel partnership program for both traditional and reverse mortgage originators who have clients that may not qualify for a reverse mortgage but could qualify for a home equity agreement,” Sullivan told RMD in April. “For us, the important thing is to be able to find a solution for the client.”