Reverse mortgage market grows with aging population
A higher level of debt in retirement is also a driving factor.
Reverse mortgages — technically known as an HECM or Home Equity Conversion Mortgage — seem to be advertised more frequently these days, and Mike Gruley says there certainly are many more requests for information about them coming in to his company.
He says there are a couple of reasons.
“We have more of an aging population,” said Gruley, director of Reverse Mortgage Operations for 1st Financial Reverse Mortgages, based in Plymouth.
He’s been selling reverse mortgages for 15 years, and 1st National is one of the largest HECM lenders in the state.
That doesn’t mean HECMs are flooding the financial landscape; he figures about 800,000 to 900,000 have been made since Congress created reverse mortgages in 1989. Compare that to tens of millions of conventional home mortgages.
The other reason for the HECM market growth is a reflection of the amount of debt out there.
“Statistically, we see that this generation coming into retirement age is less prepared than previous generations. They are statistically carrying more debt into retirement,” said Gruley.
Gregg Dimkoff, a professor of finance at Grand Valley State University’s Seidman College of Business and a certified financial planner, said a generation or two ago, the general assumption in America was “when you retired, your debts were paid off.” And if they weren’t, “you didn’t retire.”
“Now we are approaching 50 percent of all retirees who still have a mortgage. That’s ludicrous from a financial planning standpoint. That’s crazy,” he added.
According to the National Reverse Mortgage Lenders Association, a reverse mortgage is a type of loan available to homeowners, age 62 or older, that allows them to convert part of the equity in their home into cash.
It was seen as a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care. However, there is no restriction on how reverse mortgage proceeds are used.
The loan is called a reverse mortgage because instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower.
The borrower is not required to pay back the loan until the home is sold or otherwise vacated. As long as the borrower lives in the home, he or she is not required to make any monthly payments toward the loan balance.
However, borrowers must remain current on property taxes, homeowners insurance and condominium fees, if applicable. If they don’t, it is a default on the loan, according to Gruley, and the lender has the same legal remedies for recovering the money as does the lender in a standard or “forward” mortgage.
“If you’ve been out of the home for more than 12 months, that’s the legal trigger” that makes the reverse mortgage loan come due, said Gruley. But he noted that, under FHA rules, the borrower might be in a rehab facility for months and then return to the home without impacting the reverse mortgage.
HECMs are insured by and regulated by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development.
Gruley said there is one aspect to reverse mortgages that forward mortgages don’t have: There is a “no recourse” clause. For example, if housing values plummet and the sale of the house won’t cover the amount of the loan, the lender has no recourse against any other assets the borrower has — only the house.
“The rest is forgiven,” he said, the intention by HUD being to prevent a senior from finally leaving the house with debt still owed on it. Meanwhile, FHA collects an insurance premium on every reverse mortgage; the proceeds go into a pool that will help the lender recover losses, as long as all FHA rules were followed.
Reverse mortgages are complicated and they are for people 62 or older, which complicates the complication. Some seniors might find them difficult to fully understand, and they may have heirs who could become a factor in the potential borrower’s considerations.
Lake Michigan Credit Union is one of the largest home mortgage originators in West Michigan, but like many other banks and credit unions, it does not engage in reverse mortgages.
“We just haven’t really seen a large demand for it,” said LMCU spokesperson Eric Burgoon.
“It’s a difficult product to explain and to present” to a potential borrower, he added. “If you don’t have to do it, there’s not a reason to.”
When asked about major challenges in selling reverse mortgages, Gruley answered, “People don’t understand the product.”
The Internet has not necessarily helped.
“The quickness of information on the Internet can be an impediment because wrong information travels fast,” he said. “We find more people informed about them, but also more people misinformed about them. It’s almost an unlearning process we have to go through.”
Interest rates are about the same as a standard home mortgage, he said. A fixed rate can start at 4.75 or 5 percent; a variable from 2.75 to 3 percent.
When is a reverse mortgage not a good idea?
“In general, we don’t recommend a reverse mortgage as a short-term fix,” said Gruley. “It’s really considered an aging-in-place tool or a retirement tool — not a complete solution — to enable you to stay in your home.”
For example, taking out a reverse mortgage to fix up the house is a bad reason, he said.
Patrick Ervin, who works at Talmer Bank & Trust in Troy, played a key role in the sale of 250 reverse mortgages from 2006 to 2009. He is no longer in that line.
“For somebody who wants to access the equity in their home, and stay in their home a long time and not be burdened with payments, and not be concerned about leaving debt beyond the value of their home to their heirs, then it’s the right financial instrument,” said Ervin.
“This product has served a great, great purpose for those seniors over the years. It has changed lives for the positive,” he added.
Ervin said the volume of reverse mortgages was “driven down as the regulation (of the mortgage industry) has gone up” in the wake of the financial industry crisis during the Great Recession.
“It’s still a good thing for the right senior, but it’s not as good as it used to be,” he said.
Dimkoff said he understands that about 10 percent of reverse mortgages are in default because the borrower took the lump sum rather than a series of loans. “They did something with the whole thing and now they can’t pay the property tax. … They’re really in trouble.”
“Reverse mortgages are a last resort for most people,” said Dimkoff.
One benefit of the FHA requirement is that anyone interested in getting a reverse mortgage has to talk to an FHA-approved independent counselor who understands reverse mortgages.