The reverse mortgage program can be a very valuable tool for addressing issues related to aging in place in the United States, as well as circumventing some problems related to the spread of COVID-19 in senior housing and nursing facilities. However, some issues including the volatility for the Federal Housing Administration and various servicing problems need to be addressed, in addition to limiting the amount of “scandal” that some people perceive to be associated with the product category.
These were some perspectives shared by a duo of housing experts during a luncheon plenary at the National Housing Conference (NHC) Solutions for Affordable Housing 2020 virtual event on Tuesday.
While the potential for reverse mortgage lenders to provide solutions for these problems is certainly present, issues including Home Equity Conversion Mortgage (HECM) program volatility, servicing problems and reputational issues must be addressed while also determining why such products are not being used on a more widespread basis, the duo shared.
The potential for reverse mortgages to solve housing issues
The reverse mortgage product as sponsored by the federal government can be a difference-making tool for older Americans to use, though it has some issues which will require action in the next few years. This is according to Jim Parrott, a nonresident fellow at the Urban Institute and owner of Parrott Ryan Advisors in Chapel Hill, N.C.
“HECM, if designed well, is a pretty important tool for folks at the end of their life who don’t have a revenue stream outside of Social Security,” Parrott said. “[HECM can] often [help them] to maintain the standard of living that they need, particularly if they’ve got all this equity in house that they have a hard time otherwise tapping. So, it’s a valuable tool when oriented in the right direction.”
This does not diminish many of the headwinds that the product category has been facing, however, which current leaders at the Department of Housing and Urban Development (HUD) have sought to address, he explained.
“[The HECM program has] been wildly volatile in recent years with the Federal Housing Administration (FHA), and has really wreaked havoc on FHA’s books,” he says. “The [Trump] administration has taken some steps to shore up the economics of HECM in a way that showed up pretty well in FHA’s recent actuarial. HECM performed pretty well recently, even on the stress scenarios. So, I’m optimistic that it’s on a relatively solid ground now.”
Nevertheless, Parrott emphasized some of the headwinds facing the industry, which many people within the reverse mortgage profession itself have also cited as problems requiring a solution from the government.
“I think the challenge is to find ways to provide better servicing for HECM loans,” he said. “That’s been a recurring loss driver for FHA, given the way FHA rules work. They’re a little hamfisted about how you handle what ultimately becomes a pretty distressed asset over time in certain circumstances, which leads to pretty severe losses at FHA. But the way the rules work, the incentives aren’t lined up well between the originator that makes a loan and services the loan, and FHA’s interest on the back end. So they’ve got some work to do there, I think to make the economics still more sustainable over time.”
One thing that may actually help the HECM program over the next few years is the recent results of the U.S. presidential election, Parrott said, even if that may come with some program changes in the future.
“I’m pretty optimistic that this remains a valuable tool in the toolbox for the [incoming] administration going forward,” he said. “I think that the greater risk to HECM was going to be if President Trump had won, since I think that the current FHA was maybe a little more bearish about the value of HECM as a policy tool than a Democratic FHA is likely to be. But, I’m pretty confident that the incoming administration won’t throw the baby out with the bathwater, even if they might modify the program a bit.”
Overcoming existing reverse mortgage concerns
While reverse mortgages have significant potential to be very valuable in answering the needs that seniors have to address aging in place preferences, there are other problems which require solutions to help reverse mortgages further proliferate. This is according to Shekar Narasimhan, managing partner at real estate and mortgage consulting firm Beekman Advisors in McLean, Va.
“I think that [reverse mortgages] have great value,” Narasimhan said. “And we need to figure out why they didn’t work, and what the problems have been. […] The institutions that do these loans need to have some capacity, some balance sheets and longevity. There’s something about [discerning] who the tailor made seller-servicer is for this product.”
Reverse mortgages also have a particularly important role to potentially play in the world recovering from the COVID-19 coronavirus pandemic, due to the issues being experienced by senior housing and nursing facilities in combating the spread of the virus.
“Think about the post-COVID world and what we’ve learned about nursing homes and [other forms of] congregate care,” Narasimhan said. “And just think about the fact that we’re going to need seniors to actually stay in their homes, especially if they want to, and get in-home services and care. There’s a whole industry there that needs to be professionalized. How are they going to pay for that? And the answer could very well be HECM.”
This creates a visible synergy between the health and housing industry and seniors, he explained, which further emphasizes the necessity for identifying and solving the problems holding the HECM back from wider levels of adoption.
“I do see a synergy between the health and housing teams and seniors here,” he said. “I just think we’ve got to figure it out, somebody needs to [determine] the three things that went wrong that we can fix, because if people think there’s scandal associated with a solution, they won’t touch [that solution] with a 10-foot pole.”