Will financial planners resuscitate the reverse mortgage?
New loan originations have fallen sharply since their peak year in 2008. Reforms put in place by the federal government several years ago have led the reverse lending industry to target more affluent potential borrowers—the households that tend to work with planners. And some retirement researchers have been making the case that planners should revisit Home Equity Conversion Mortgages (HECMs) as a key component of client retirement plans.
But it’s going to be a tough putt. A recent survey shows that older homeowners don’t understand the product well and are not comfortable with it. What’s more, the new regulations have increased HECM fees and reduced the size of initial drawdowns for larger loans.
Most reverse loans are administered and regulated by the U.S. Department of Housing and Urban Development (HUD). In 2013, HUD clamped down on HECMs, issuing new rules aimed at reducing defaults on loans. Defaults had become a problem in the industry—especially when newspapers started publishing stories about seniors losing their homes in certain cases. Although the loans have no payments, borrowers must keep their homeowners insurance and property taxes current and maintain the property.
The changes reduced total loan amounts, raised fees and, importantly, introduced a required financial assessment to make sure borrowers had the capacity to meet their obligations and terms under the HECM.
Meanwhile, consumer interest remains low. Just 14 percent of Americans ages 55 to 75 have considered a reverse mortgage, according to a recent survey by The American College of Financial Services. The survey queried more than 1,000 people ages 55 to 75 with at least $100,000 in investable assets and $100,000 in home equity. The number one reason (44 percent) people did not enter into a reverse mortgage was they did not need it because of sufficient income. Other reasons, in order, were “too young” (18 percent), “not ready” (10 percent) and “too risky” (9 percent).
“Americans don’t understand the reverse mortgage product,” said survey author Jamie Hopkins, professor of retirement income planning at the college.