Reverse mortgage potential is high, but seniors remain resilient


Older US homeowners are more likely to be denied traditional and ‘forward-thinking’ methods of exploiting their home equity, a difficulty compounded by the cohort’s growing debt levels and insufficient financial resources. retirement savings later in life. However, while collective retirement home equity has reached levels totaling over $ 9.5 trillion at last count, there is still a general aversion to exploitation of home equity, even considering its growing viability as a tool to improve the quality of life of older people.

These are just a few of the findings published this week in a high-profile Urban Institute report titled “Mortgage Refusal Rates and Household Finances among Older Americans.” The study, co-authored by Karan Kaul, Senior Research Associate at Housing Finance Policy Center (HFPC) and Linna Zhu, Research Associate at HFPC, aims to examine the impact of changing statutes and realities related to how senior borrowers are served by lending institutions; and how economic factors, including pricing conditions and savings levels, can affect the choices seniors make about their finances.

The research was funded by reverse mortgage lender Finance of America Reverse (FAR). However, the lender had no input or involvement in the data cultivated, nor in the way it is presented in the final report. For further background, RMD sat down with Kaul and Zhu to talk more specifically about their findings regarding the Home Equity Conversion Mortgage (HECM) program.

The results and how reverse mortgages interact with the situation of the elderly

The very general finding of the research, according to Kaul, revolves around the refusal rates for seniors on equity mining products and the differences that emerge when reviewing equity mining offerings “to. term ”and home equity conversion mortgages (HECMs), he said.

“What we’ve found is that when you look at refusal rates over the past three years – 2018-2020 – there is generally a downward trend in refusal rates for older Americans, and that ‘is good,’ Kaul told RMD in an interview. “But when you look at the denial rates for different products, for example, we’ve looked at the denial rates for purchase mortgages, withdrawal refinances, no-withdrawal refinances, home equity loans and HECMs, this that we found relates specifically to equity extraction. products, what we’re seeing is that HECMs tend to have the lowest denial rates for seniors, compared to things like HELOCs and refinancing withdrawals, which tend to have lower denial rates. much higher refusals.

These rejection rates have tended to drop over time over the past few years, mostly due to falling interest rates, he says.

“It just means that if interest rates are lower, it means that monthly debt payment obligations will be lower as a percentage of a borrower’s income,” he explains. “So it just becomes easier for people who qualify on the Debt-to-Income Ratio (DTI) measure. But again, the big story is that we have seen the refusal rates go down in those three years because of the drop in interest rates. Still, equity futures mining products have rejection rates that are considerably higher than what we find for HECMs. “

It’s also compared to younger borrowers, Zhu said.

“We find that the rejection rates, especially for a HELOC and a withdrawal refi, are much higher for older owners,” she adds.

One of the reasons seniors are more likely to be approved for a reverse mortgage is the different circumstances that come with a HECM compared to traditional options to extract futures, Kaul explains.

“Obviously, conversely, the monthly payment obligation isn’t there, so a borrower doesn’t have to repay the loan every month,” he says. “You don’t have to pay off the loan in monthly installments, which means DTI becomes much less of a problem. You need to save enough money to cover your PMI, taxes, and insurance every month, and that’s the underwriting element that exists in a reverse mortgage. So that means it will be easier for a lender to approve you than for a term mortgage.

Reverse mortgage lenders naturally place less weight on income in the underwriting process, Zhu adds.

Seniors’ sentiment towards reverse mortgages: “stable” can also mean “flat”

While it is easier for a senior to obtain a reverse mortgage compared to other equity futures extraction options available, demand for the HECM product category has been relatively stagnant even though there is had a recorded increase in gross volume, Kaul says.

“Although HECM volumes have increased over the past two years, we’re talking about very, very small numbers here,” he says. “It’s hard to speculate on what could be causing this, but I’m pretty sure part of it is rising house prices. Part of that can also be interest rates, but we’re talking about 35-40,000 loans per year versus a much higher figure for cash refinances.

Zhu had this much higher number on hand.

“[There were] 330,000 [cash-out refis] in 2019, ”she said.

Causation is difficult to empirically follow when it comes to matters of sentiment, Kaul says. It is empirically true that a modest increase in HECM volume accompanied a more favorable interest rate environment, but it is much less precise to determine what change there has been – if any – in reverse mortgage sentiment. in the elderly, he explains.

“Believe me, as an economist, nothing frustrates me more than these behavioral things, and that you just can’t measure,” he says.

Another thing that can hold back a wider penetration rate for the HECM product is the cost, Zhu says.

“The problem isn’t just a lack of financial literacy among senior homeowners,” she says. “It is also a very expensive product. The high upfront fees and crossover rates are really high, especially for those who choose to take a flat-rate mining approach. So when the time goes by, the accrued interest that they will have to pay at the end is really high.

Even though sentiment and these other behavioral components are difficult to measure, other ideas emerge when controlling factors such as home price appreciation.

“Even though we control the rate of house price appreciation, we have to take into account other factors, such as the high costs of extracting home equity through the HECM channel, as well as the risk of crossover. potential, certainly in the current mechanism. . “

What the industry and its regulators should keep in mind

As for what the reverse mortgage industry and government authorities overseeing the HECM program can do in the future, making the product more accessible to future seniors will be critical in order to increase adoption of a product that could make a difference for seniors who need to find adequate financing solutions for retirement, says Kaul.

“I think one of the things that I think deserves a closer look is HUD’s HECM program,” he says. “I think what’s happened over the last 10-11 years is that we’ve actually made – like everything else in the mortgage market – more difficult for people to qualify for HECMs. The product has encountered some challenges in the past with respect to reputational risk and consumer education.

These difficulties have also forged a reverse mortgage industry that has made demonstrable progress, says Kaul. Still, getting a reverse mortgage shouldn’t have the same kind of intellectual intensity as getting a college degree, he says.

“In my opinion, the industry has come a long way,” he says. “I think that with some targeted policy interventions, you can actually make the product easier for consumers to understand so that applying for a reverse mortgage doesn’t look like you’re getting a bachelor’s degree. You just need to streamline the process, make it more efficient, lower costs, and make it easier for people to understand what they are getting into.

The underwriting criteria may also be worth considering for anyone inclined to reform the HECM program, he says, including major limiting factors (PLFs).

“[PLFs] have cut in the other direction in recent years and simply made it difficult for borrowers to use the product, ”he says. “So I certainly hope there will be a movement in that direction in the years to come just to make it a little more accessible.”

Read it research at the Urban Institute.

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