Across the globe, countries are facing an aging population that is unprepared to retire, and many governments are turning to reverse mortgages as an option to help fund longevity — the United States is no different.
With 10,000 baby boomers turning 65 each day for the foreseeable future, the United States needs to be a pioneer of the reverse mortgage product, and it has been.
The Department of Housing and Urban Development launched a demonstration program in 1987 and after a 10-year evaluation, the product became permanent in 1998. Through the years the program has seen its ups and downs.
In 2000, the industry originated 6,640 units, while volume hit record numbers in 2009 with 114,692 reverse mortgages being insured under the Home Equity Conversion Mortgage (HECM) program. Since then, things have been difficult.
During the Great Recession, the reverse mortgage industry was hit like all other financial services sectors, but it hasn’t recovered like most traditional lending products. During the fiscal year 2017, the industry endorsed 55,332 HECMs, and this year hasn’t been much better.
In June, the industry hit a low point by endorsing only 2,838 HECMs, a 13-year low according to Reverse Market Insight, a data analysis firm. The bleak numbers didn’t come as any huge surprise to most who live the business every day, but things could be about to change.
What’s preventing the industry from growing in the United States?
On the surface, figuring out why the industry hasn’t been growing seems simple. One could argue that the government has changed the product so many times, lowered the benefit to borrowers, and increased regulation so much that it’s no longer a viable solution.
It’s a fair argument to make, but one that I don’t agree with anymore.
As someone who studies the business of retirement and aging every day, there are a couple of things to point out.
Even after all the principal limit reductions, the Federal Housing Administration’s reverse mortgage is still the most competitive product in the world. There is no other reverse mortgage product that provides so much in proceeds with so many protections for the borrower and the heirs —not even close.
If you look at the Canadian market, the industry is booming. HomeEquity Bank, the leading provider in Canada, saw volume grow 40% with a product that provides far less in proceeds, protections, and benefits.
In Australia, the government sees the reverse mortgage as part of the solution to help older Aussies retire and age in place comfortably. In China, which has the world’s fastest-aging population and a pension system hit by shortfalls, the government announced it will start allowing reverse mortgages for seniors nationwide.
Imagine if the United States government started looking at reverse mortgages as part of a policy strategy going forward for a population that hasn’t saved for retirement.
According to data from the Federal Reserve’s regular Survey of Consumer Finances, the average household retirement savings for those aged 64 to 75 is only $358,400, with the median being $126,000. When you factor in that Fidelity estimates the average retired couple aged 65 and over in 2018 may need approximately $280,000 saved — after tax — to cover health care expenses in retirement, it is obvious there is a major problem coming for the United States.
There will need to be a public policy solution to this problem, and it’s hard to argue that reverse mortgages won’t be part of the solution going forward, as the government will need to help retirees tap their own assets during retirement.
Based on these factors, the reverse mortgage industry in the United States is poised to grow. It’s not a matter of if; it’s only a matter of when.
The Government’s Backing of Reverse Mortgages Going Forward
Despite volume for the government’s reverse mortgage product being at historic lows, there is a reason for optimism going forward. If there is one thing I’ve learned covering this industry over the last 13 years, it’s to never underestimate the importance of leadership at the Federal Housing Administration when it comes to reverse mortgages.
Current FHA commissioner Brian Montgomery has been a strong supporter of the program in both of his terms at the helm.
“I have been a strong advocate of the reverse mortgage program,” he said during a call with reporters last month. “This program allows seniors to age in place, which they want to do. It’s the best kind of program [in that it offers] assistance you pay for yourself…It’s up to us to fix it for the long term.”
There have been a lot of fixes over the years, with the reduction of principal limits being the lever pulled most often to help stem the losses from the program. Based on additional comments from Montgomery, it seems as those days might be over for now.
“If you make further changes to [principal limit factors], pricing changes, what is the tipping point to where volume drops, and there are impacts to the [HECM mortgage-backed securities],” he said. “I am very mindful of that, but looking at the back end of the process, once the loans are assigned to HUD is the area we are focused on. I am not sure further [principal limit] cuts are going to fix that problem.”
With the beginning of HUD’s fiscal year on October 1 rapidly approaching, we should know very soon what changes could be coming, and for the first time in a while, I’m optimistic.
The U.S. Model for Reverse Mortgages Going Forward
When the subprime crisis hit, the industry became acutely aware that there was a reputation problem, and it has been dealing with it ever since.
While it has been a painful transition, the industry has risen to meet the challenges and confront the reputation image issue in a thoughtful, strategic approach. Years ago, the National Reverse Mortgage Lenders Association and its members started to position the product as a retirement tool, and over the years that has been backed up by many in the financial planning industry.
Numerous academic journals have published research that shows reverse mortgages can be a key part of an overall retirement strategy and it’s hard to argue they shouldn’t be part of the discussion with so much information now available.
The way lenders are positioning themselves has also taken a dramatic change. In years past, it was thought that in order to be successful originating reverse mortgages, you had to go all in. If you offered traditional lending products, you would be distracted, and you had to have this unique knowledge of the product and borrower that required a sole focus on reverse mortgages. Those days seem to be over.
We are seeing industry leaders such as American Advisors Group, along with new players like Mutual of Omaha Bank through its acquisition of Retirement Funding Solutions, offer a suite of products to help older Americans age in place. This personalized approach to mortgage lending and financial planning is the future.
Going forward, I fully expect others to follow suit, and once there are more successful transitions, it’s only a matter of time before we see some of the larger banks and institutional investors get back into the business, following this model.
The industry is also no longer constrained by one product to help borrowers tap their home equity; they now have a small arsenal that includes the HECM, home equity loans, and private products.
With the changes implemented by the government to the HECM, the industry has been forced to work together to bring back the private market. Creating new products is no small task, and the industry should embrace these alternatives going forward as a means to carrying the concept of a reverse mortgage forward.
Despite the tough times many are experiencing, there is plenty of room for optimism in this industry. All the years of hard work to position reverse mortgages as a financial planning tool, diversify from a 100% government-backed product, and strengthen the health of the program are starting to bear fruit.
Never before have I seen the industry so well-organized behind its mission to be a solution to help a broader range of seniors tap their home equity to ensure a better retirement.
It’s a new approach and one that is bringing new life and interest to an industry full of opportunity. While it has taken a long time and a lot of hard work, all of the pieces of the puzzle seem to be putting the industry in a very exciting place — a position for growth going forward.