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10% of Older Homeowners Could Benefit from HECMs, Other Equity Loans

About 10% of the homeowners aged 65 and older would benefit from the use of home equity extraction tools, according to a new study from the Urban Institute — but major structural and institutional barriers remain.

Researchers Laurie Goodman, Karan Kaul, and Jun Zhu explored the untapped market for reverse mortgages and other home equity conversion products, analyzing the relationship between equity and liquid net worth. For a large swath of older Americans — specifically those with more than $100,000 in home equity but $50,000 or less in liquid net worth — converting that equity into cash represents a significant retirement strategy.

“This report shows that millions of U.S. households lack adequate income and savings, but possess a significant amount of home equity wealth,” the researchers wrote in the study, which was funded by Finance of America Reverse and used data from the Federal Reserve’s 2016 Survey of Consumer Finances. “For these households, liquefying a portion of their home equity by converting it into cash could allow them to pay back debt to eliminate or reduce monthly debt payment burden, or boost household income.”

The benefit is particularly significant for older Americans of color. Home equity represents a vastly larger percentage of black and Hispanic homeowners’ overall net worth; for instance, median non-home asset wealth for black Americans sits at just 5% of what the median white homeowner has. For Hispanic homeowners, that number sits at 2%.

“Black and Hispanic senior households are disproportionately more likely than white senior households to deplete savings sooner, and may need to tap into home equity,” the team wrote.

But as professionals in the Home Equity Conversion Mortgage space are likely to know already, the researchers also found that use of equity-release products has been low. Citing numbers from the University of Michigan’s Health and Retirement Study, the Urban Institute notes that in 2014, just 0.9% of homeowners and 65 and older had a reverse mortgage; by comparison, 1.8% had sold their homes to tap equity, 1.4% used a cash-out refinance, and 11.4% had an active home equity loan, second mortgage, or line of credit.

Echoing a report Kaul and Goodman released earlier this year through the Urban Institute, the team included a laundry list of reasons why seniors might be afraid of using home equity in retirement.

“Impediments to extracting home equity can be attributed to factors that include an aversion to debt and a general desire to stay financially conservative, a desire to leave a bequest or save for emergencies, fear of losing the home, product complexity, high costs, and fear of misinformation and fraud directed at the elderly,” they wrote.

Still, the group pointed to positive demographic trends, with the aging population creating volume almost by default.

“Even if we assume that future home equity extraction rates will remain at today’s low levels, the aging of the population alone will expand this market,” they wrote.

Additionally, the rising number of older Americans with first mortgages could provide an opportunity for HECM and other lenders.

“Many households carrying mortgage debt into retirement will likely not be able to afford monthly payments, and could access liquidity and smoothen consumption with a reverse mortgage,” the team said.

Check out the full report at the Urban Institute.

Written by Alex Spanko