An Urban Institute study in February points to senior homeowners being the most wealthy in home equity in the U.S in 2015. Of the $11 trillion in total home equity, $4.4 trillion is owned by those in the ages 65 and above per the study. Despite this wealth of home equity and methods to access it like reverse mortgages, only a few senior homeowners are tapping their equity for their retirement.
“Not At All Interested”
“In spite of this wealth and the availability of multiple equity extraction mechanisms – primarily Home Equity Conversion Mortgages (HECMs), closed-end home equity loans, Home Equity Lines of Credit (HELOCs), and cash-out refinance – few retirees tap into home equity, and most who do typically wait until they experience a serious financial shock, such as substantial medical expenses or the death of a spouse,” according to the research report by Karan Kaul and Laurie Goodman for the Urban Institute.
This point is affirmed by a Fannie Mae National Housing Survey® used in the report whereby some 80% of homeowners with ages 55 and up said they were “not at all interested” in tapping their equity.
Limited demand followed by inadequate financial literacy, high costs, and insufficient credit availability. The researchers found these as the primary reasons why home equity extraction mechanisms remain untapped by most senior homeowners.
Reverse Mortgages Trends and Recommendations
Reverse mortgages have been around for almost 60 years now and only a tiny fraction of targeted senior borrowers, as shown in the numbers below, have used this type of home equity extraction mechanism.
HECMs, which are reverse mortgages backed by the FHA, have seen their numbers rise and fall post-crisis. As of 2015, there were 58,043 HECM cases endorsed to the FHA worth $9,491,863,805. Compare this to 114,692 HECMs endorsed in 2009 totaling $22,020,955,847.
Then there’s the proprietary reverse mortgage which almost disappeared after the financial crisis. Comparable to a jumbo loan, proprietary reverse mortgages attract the wealthy because they can borrow more out of their substantial equity compared to the FHA-backed ones.
With respect to reverse mortgages, the researchers found these trends:
- Reverse mortgages are complex. Using data from the Fannie Mae NHS®, 49% of homeowners surveyed revealed they were familiar with reverse mortgages but when they were asked about the loan’s most concerning aspect, 9% out of the 49% said “difficult to understand”.
- Reverse mortgages are more vulnerable to misinformation and scams, owing to misleading and aggressive advertising, according to the researchers. Indeed, 20% of the homeowners in the Fannie Mae survey revealed getting scammed concerns them the most.
- Remaining reverse mortgage lenders have limited brand recall and limited scale of operations. Big players like Bank of America and Wells Fargo exited the reverse mortgage scene in 2011 and in their stead, smaller-scale lenders cropped up. The latter’s limited access to capital “can inhibit their ability to reach more potential borrowers nationwide,” the researchers said.
- Reverse mortgages tend to be more popular with less credit-worthy seniors. The research found that the tightening of credit post-mortgage crisis hit those seniors with scores below 660. Even when the credit approval rate among all seniors improved, this translated to little increase in HECM origination.
What the Research Recommends
To remove barriers to tapping reverse mortgages, the researchers recommend for (a) a more improved financial literacy on reverse mortgages including enhancements to HECM counseling and introducing it early in a borrower’s life, (b) a reduction of costs of reverse mortgages, and (c) an improved access to credit by reducing HECM mortgage insurance premiums for one.