The reverse mortgage market got some new respect earlier this year. When it looked like Covid-19 might wreck the retirement plans of older Americans, some turned to these mortgages to tap a new source money.
Home equity conversion mortgages (aka, reverse mortgages) allow those 62 and older to take equity out of their homes without monthly repayments; the homeowners don’t have to pay this money back until they die as long as they stay in their houses, and the money can be taken as a lump sum or line of credit. In the first months of the pandemic, reverse mortgages likely looked like a good way for retirees to tackle their expenses when other investments were cratering.
In August 2020, reverse mortgage endorsements reached 4,007, according to the data from the Department of Housing and Urban Development compiled by advisory firm New View Advisors. That’s up from 2,341 endorsements in August 2019. In May of this year, the endorsements figure shot up to 5,038, and it’s been hovering above the 4,000 mark in the months since then.
A working paper released in mid-September by the Pension Research Council at the University of Pennsylvania’s Wharton School suggests that older Americans aren’t using reverse mortgage home equity as much as they could be (or as much as they do in the U.K. and Canada), as many people are skeptical about the loans’ prices and terms. “Reverse mortgages have long been viewed with skepticism by some retirees, financial planners, and financial institutions,” write researchers Christopher Mayer of the Columbia Business School and Stephanie Moulton of Ohio State University in their paper, “The Market for Reverse Mortgages Among Older Americans.”
“Potential concerns are many, including high costs, dicey sales practices, and the potential of retirees to lose their home if things go badly.” They are more likely to be adjustable-rate vehicles, the paper said, and the up-front insurance premium required by HUD is steep—2% of the home’s value. Reverse mortgages are also less loved by those who want to leave their homes to heirs. The authors also note that brand name loan originators left the space after a bad luck streak in the late 2000s.
“After the 2008 peak,” they write, “reverse mortgage originations plummeted over more than a decade, with tighter underwriting, lower borrowing proceeds, and the exit of many brand name originators. Until 2014, the [Federal Housing Administration] did not require financial underwriting for borrowers. While there are no required mortgage payments for a reverse mortgage, borrowers must still pay property taxes and insurance to be in compliance, and an appreciable number of borrowers from 2009-2012 took out full draws and were left with no money to cover these costs.”
That led to a spike in defaults and foreclosures on borrowers unable to make property tax and homeowner’s insurance payments, they said, “with attendant poor publicity.”
Still, the authors of the Wharton paper found that while only “17% to 27% of actual and rejected borrowers would have qualified for a HECM reverse mortgage” in 2018, that number is still “nine to 14 times the size of the actual HECM market.”
According to the authors’ simulations, “17% to 25% of denied forward mortgage borrowers would have sufficient home equity to originate a [reverse mortgage] at their requested loan amount, corresponding to 98,000 to 147,000 older adults.”
Reverse mortgage numbers pale in comparison to the other ways people spike into their home equity: “In 2018, only 33,000 originated reverse mortgages were reported in [the Home Mortgage Disclosure Act], versus 609,000 originated equity extraction loans such as HELOCs [home equity lines of credit]; cash-out refinancing; first liens not for refinance or purchase; and second liens, all of which require traditional mortgage payments, typically for 15 to 30 years,” the Wharton researchers write.