The way that reverse mortgages – both the Federal Housing Administration (FHA)-sponsored Home Equity Conversion Mortgage (HECM), and various proprietary options – are not meeting many of the varied needs of today’s American seniors, most especially in terms of the debt that many seniors are already saddled with prior to engaging in such a loan. This is one reason for the lack of widespread reverse mortgage use posited by financial website MarketWatch in a featured article published this past weekend.
In addition to touching on other industry and product-relevant topics including the low penetration rate of reverse mortgages when compared to traditional, forward mortgages, as well as occupancy requirements and borrower perceptions depressing volume over much of the last two decades, debt is highlighted as a major impediment to the widespread adoption of reverse mortgages according to the piece.
“[T]here’s also evidence to suggest that reverse mortgages, by design, aren’t meeting retirees’ needs as well as they could,” the article reads. “One of the biggest barriers preventing more Americans from taking out a reverse mortgage is the fact that they’re already saddled with a ton of debt. A couple of decades ago, around 20% of Americans over age 65 had a mortgage, but today that figure is over 40%. Consequently, it’s not surprising that paying off existing mortgage debt is one of the main motivating factors for many seniors in choosing to get a reverse mortgage.”
A primary reason that some prospective reverse mortgage borrowers do not initially qualify for the loan is due to significant pre-existing housing debt, the article says. If a sizable forward mortgage balance already exists on a home, it must be satisfied to place the reverse mortgage in first-lien position, which could adversely affect the proceeds the borrower will have access to, it reads.
This is exacerbated by existing FHA limits on how much equity can be pulled out of a home through the use of a HECM, for some seniors making a potential reverse mortgage more trouble than it is worth.
“It’s this Catch-22 of I’m carrying more mortgage debt into retirement, but carrying more mortgage debt into retirement actually makes it harder for me to get something like a reverse mortgage,” said Stephanie Moulton, a researcher at Ohio State University who has spoken about reverse mortgages in the past, to MarketWatch.
A possible solution for this kind of a problem could be the new product recently announced by Finance of America Reverse (FAR), “EquityAvail,” a hybrid forward/reverse mortgage that FAR has described as an option for a senior who is already looking to refinance their existing mortgage into something that makes more sense for someone preparing to transition into living on a fixed income.
However, the difficulty in finding a reverse mortgage solution for a senior borrower who could benefit is made more difficult by the lack of major financial institutions which are present in the space, the need to rely on an “obscure broker that you haven’t heard of before or [a lender you] have only seen commercials [for] on TV,” Moulton explained to the outlet.
Additionally, the 2013 demise of the small-dollar “HECM Saver” loan can be seen as reducing access further, though researchers like Moulton contend that there is still some value to be found in a potential future small-dollar HECM in the same vein as the HECM Saver, the article says.
Read the article at MarketWatch.