Reverse mortgages should be a breakout product of demographic destiny.
Millions of older Americans are hurtling toward very uncertain retirements. Survey after survey documents a serious lack of retirement planning and nest eggs too small to support even modestly comfortable retirements. Continued longevity gains are extending the retirements of many people to 20 and 30 years, if not longer. Government spending on seniors is threatened by budget deficits and conservative opposition to government programs.
Where will the money to support tomorrow's retirees come from? Enter the reverse mortgage. It is the only mainstream financial product that permits older Americans to tap the equity in their homes. Reverse mortgages allow homeowners to get money out of their primary residences, and also free them from making future mortgage payments for as long as they live in their homes.
The U.S. Federal Housing Administration (FHA) has an insured loan program that protects lenders from financial losses from any such borrower defaults, and also provides borrowers with guaranteed access to the home equity funds promised by their lender. This program is called the Home Equity Conversion Mortgage, or HECM, and it has chugged along quietly for years.
Reverse mortgages should be a big success story these days, but the opposite is true. Lenders have left the industry, numbers of new reverse mortgages have declined, many borrowers are in technical default on their reverse mortgages, and efforts to develop better lending standards to expand the industry have, so far, fallen flat.
The annual volume of HECM loans exceeded 100,000 in 2007, 2008, and 2009, rising to more than 114,600 for the fiscal year ended Sept. 30, 2009. But loans totaled less than 80,000 a year in fiscal years 2010 and 2011. And during the final three calendar months of 2011, loan volume plunged to less than 14,000.
Because a reverse mortgage is supported by the borrower's equity in his or her home, lenders historically haven't worried much about a borrower's income or ability to repay borrowed funds. In fact, reverse mortgages are set up as non-recourse loans. Once a borrower's equity in their home is gone—that is, after a lender has used the borrower's remaining home equity to make scheduled loan payments on the mortgage—the borrower can stop making the payments and continue to live in the home for as long as they want or are able. When they die, their heirs can pay any accrued loan charges and keep the home or simply hand over the keys to the lender and walk away.
Consumer advocates tend to support reverse mortgages as a last-resort product that seniors should consider only when they have no other ways to meet retirement expenses. There have been concerns about high lender fees for the loans. Several years ago, there were reports that some seniors had been convinced by overly aggressive lenders to take funds out of their homes and use them for ill-advised financial investments. Stepped-up consumer counseling efforts seem to have largely stemmed such abuses.
And in recent years, some very large financial companies decided that there would be a growth market for reverse mortgages among rising numbers of aging Americans searching for some kind of silver bullet to finance their retirements. The group included Wells Fargo, Bank of America, and MetLife. Great things were predicted for a financial security product that would meet a legitimate financial need and add to the product offerings of the insurance and retirement products industry.
Unfortunately, the Great Recession and housing collapse got in the way. Many older homeowners had paid off all or most of their mortgages, and should have been poised to boost reverse-mortgage activity. But many owners looked on as the value of their equity plummeted along with falling home values. Taking out a reverse mortgage didn't seem like such a good idea until home values recovered. Today, of course, that largely still hasn't happened.
The FHA even tried to help lenders by stimulating demand for HECM loans. Its insurance premiums for the HECM program totaled thousands of dollars in upfront payments and made the loans expensive. So in 2010, it introduced a HECM Saver product that nearly eliminated those premiums. To protect itself from defaults, the HECM Saver product holds back a big chunk of home equity to cover future obligations to lenders. This lowers the percentage of a home's equity that owners receive. Lower fees or not, the lower equity payments reduced the appeal of the product to some potential borrowers.
At the same time, it turned out that lenders' lack of concern for the financial condition of reverse-mortgage borrowers was misplaced. While borrowers are freed from future mortgage payments, they continue to be responsible for paying home insurance premiums and property taxes. It turns out that about 8 percent of all HECM borrowers—more than 45,000—were unable to make all of these payments. The FHA and lenders have been struggling to provide these borrowers with special financial counseling and repayment programs.
Wells Fargo and Bank of America decided to get out of reverse mortgages. The FHA and remaining lenders have been trying to develop a new set of financial requirements to insure that new borrowers will be able to maintain the insurance and taxes on their homes.
After nearly two years of efforts, the FHA still has issued no specific guidelines. MetLife developed its own guidelines late last year. But its revised program ruled out lots of potential borrowers and placed it as a competitive disadvantage with other lenders. Last week, it announced it would at least temporarily shelve the new guidelines.
"The FHA and industry representatives were aware that some market confusion might occur as a result of the introduction of lender specific financial assessment guidelines for the HECM program prior to FHA publishing formal guidance," the FHA said in a statement to U.S. News after the MetLife decision. It said it would continue to work with HECM lenders to develop guidelines, but provided no time frame for doing so.