Economic pressures brought about by inflation do not typically come with many potential benefits, but for the reverse mortgage business, there may be an opportunity to be found in a challenging economic environment for those offering Home Equity Conversion Mortgages (HECMs) and other equity release products.
This is according to a presentation made by leaders from Reverse Market Insight (RMI) — President John Lunde and Director of Client Relations Jon McCue — during the National Reverse Mortgage Lenders Association (NRMLA) Eastern Regional Meeting earlier this month in Baltimore, Md.
Additionally, while the reverse mortgage industry would do well to continue focusing on bringing new customers into the fold as the HECM-to-HECM (H2H) refinance boom appears to be over, the addressable market only continues to grow.
Inflation as a tailwind, demographics remain favorable
Data shared from the U.S. Census Bureau indicates that there continues to be a favorable demographic environment for seniors who are turning 62 (the eligible age for a HECM) and 55 (the age of eligibility for several proprietary reverse mortgages).
“Each of those bars [represents] 4 million-plus people,” Lunde said referencing a graph illustrating the data. “So we have a tremendous opportunity, and we have a tremendous tailwind in our favor for demographics. It’s always been true of this product, and it continues to be true. You can see that we’re not looking at any trough or decline from that perspective.”
Of course, there is one primary economic factor influencing a lot of financial conversations currently, and that’s the level of inflation the nation is experiencing having reached its highest level in 40 years. Naturally, the negative impacts are widely discussed, but it could have positive impacts on the reverse mortgage business, Lunde explains.
“Inflation has been a recent topic, and while it has quite a bit of negative impacts in many ways, in this industry specifically this is a tailwind, I would argue,” Lunde says. “Number one, a big component of inflation has been home prices going up. That obviously creates additional possibilities and potential for the reverse mortgage product. Second, folks that are looking at this and [examining their] financial planning which assumed maybe 2%, inflation.”
Those assumptions about what inflation might look like over the next several years have had to be adjusted by the current activity in the economy, Lunde says.
“We’re in the process of resetting those expectations pretty dramatically,” he says. “So, in thinking about how folks are feeling the pinch, the levels [of inflation] that we’re at will argue pretty persuasively for them to [potentially] consider new things or things they might not have considered previously.”
All of these factors combine into potential possibilities especially when it comes to seeking out new customers for reverse mortgages, Lunde explains.
People are most likely to feel inflationary pressures in the costs of everyday living, which have risen considerably, explains McCue. Over the past year, the cost of groceries has risen 11.9%, while the cost of gasoline has increased nearly 50% in the same time period. Utility costs have also gone up, with electricity rising by 12% and natural gas rising 30.2% in the same period of time.
“If you’re someone on a fixed income, [then you may be] trying to decide between paying for the air conditioning in the summer or heat in the winter, or groceries,” McCue explains. “Some of these people were having to literally make these decisions.”
Property taxes have also seen an increase in response to home price appreciation, and for those unable to lock in prior property tax rates or who live in a state with appraisal-based property taxes, these costs can have a severe impact on the financial stability of older Americans, McCue says. Some people have been unable to afford their home’s expenses for years, particularly in high-value real estate markets such as San Francisco or Seattle, he explains.
“I live in Texas,” McCue says. “You know that freeze that you guys probably heard about? It’s driven up [the cost of] home insurance. There are things like wildfires and hurricanes, and it all leads to home insurance going up. And then if you have to do any repairs on your house, if you’ve been living in a home for however long, repairs are inevitable.”
Those associated costs are rising as well since ongoing difficulties with supply chains have led to increased costs for materials on top of the other pressures that retirees may be feeling. These other factors may also contribute to more people entertaining other potential financial tactics in retirement, including reverse mortgages, McCue says.
“I’ve been talking to a lot of loan officers over the past couple of days, I hear about the ones that are going through losing some deals,” McCue says. “I feel for you guys, but keep in mind that it’s a very tiny number that we’re talking about. There are so many more people out there. One of the things to keep in mind is that even people who once thought they were financially secure, now they might not be feeling that so much.”