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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2011

A Forward Look at Reverse Mortgages

As baby boomers age, many may face financial shortfalls

Without a doubt, the reverse- mortgage market faces some serious and significant challenges. As property values continue to shrink, many senior borrowers find themselves with less equity in their homes. Moreover, many reverse borrowers have defaulted by failing to make necessary tax and insurance payments. And underwriting standards for government-sponsored reverse mortgages could tighten further, thus keeping many borrowers from qualifying.

Those problems and others represent major concerns for mortgage brokers and loan originators working in the reverse-mortgage space. At the same time, many reasons exist to be excited about the future, including increased curiosity about reverse mortgages. This market is poised to enter its strongest period yet.

Brokers and originators who want to diversify their lending business should give reverse mortgages serious consideration.

"Recent reports indicate the financial needs of the senior population are growing."

Although the U.S. Department Housing and Urban Development has tightened the rules governing Home Equity Conversion Mortgages (HECMs) — which are backed by Federal Housing Administration (FHA) mortgage insurance and responsible for about 99 percent of the reverse market — it also has made some positive adjustments to the HECM program. Those changes can decrease the cost of taking out a reverse mortgage and broaden the product's appeal.

The biggest change was the launch of the HECM Saver program, which effectively eliminated the upfront mortgage-insurance premium, reducing it to 0.01 percent of a home's value. That compares to an upfront premium of 2 percent for loans taken out under the HECM Standard program.

In return for the lower premium, seniors can't borrow as much money using a HECM Saver as they can with a HECM Standard. But that doesn't make the Saver less attractive. On the contrary, the drastically lower fees and smaller loan sizes will appeal to a different — and larger — pool of prospective customers.

For example, the HECM Saver should appeal to seniors who want a smaller loan and those put off by the higher costs associated with the Standard program. In some cases, borrowers might be seeking a short-term loan they can pay off.

Less than six months after the Saver option was introduced this past October, some reverse-mortgage originators reported that it accounts for 20 percent of their new business. In addition, the reverse market has expanded in response to increased FHA- lending limits, which for HECMs reach as much as $625,500 through at least this coming Sept. 30.

Aging boomers

Besides favorable changes to reverse-mortgage lending, the long-term argument for reverse mortgages is as compelling as ever, if not more so. There are now about 34 million Americans aged 65 or older. By 2030, that number is expected to nearly double and account for about 20 percent of the U.S. population. Borrowers must be at least 62 years old to qualify for a HECM loan.

Right now, more than 12 million seniors in the U.S. own their homes free and clear. Those homeowners have an estimated $4 trillion in equity. That's a lot of loan collateral waiting to be tapped, and it doesn't even speak to the millions of other seniors with enough equity to qualify for a reverse mortgage.

In 15 years, when the youngest baby boomers turn 62, as many as three out of four senior homeowners could have reverse mortgages. Although that might seem like wishful thinking to some, it's certainly reasonable to expect that three-quarters of senior homeowners will need to augment their finances as they age. Reverse mortgages likely will play a major role for many.

Recent reports indicate the financial needs of the senior population are growing. Moreover, according to a MetLife study, the notion of working until about age 60 and then retiring is likely over. Instead, financial obligations will force many seniors to continue to work.

In addition, a study by a professor at the Brown School at Washington University in St. Louis found that 58 percent of people ages 60 to 84 won't have enough liquid assets to withstand an unanticipated expense or reduction in income, and almost half of people between 60 and 90 will encounter at least one year of poverty or near poverty.

Clearly, many people will need additional financial resources.

Brokers can help

Although they may be in need financially, many seniors will need other reasons to consider a reverse mortgage. Mortgage brokers and loan originators eager to help can point to a recent survey conducted for the National Reverse Mortgage Lenders Association. It found almost three-quarters of senior citizens who have a reverse mortgage said they were satisfied with it.

The survey also found that close to 50 percent of seniors worry they won't have enough money to support themselves in retirement. In other words, there's little to no question about current and future consumer demand for reverse mortgages.

The same will likely soon be true of investor demand. As reverse mortgages build market share, money managers, banks, hedge funds and others will look to capitalize on the trend. Until about a year ago, Fannie Mae was the biggest buyer of reverse mortgages. Now, many are packaged into bonds guaranteed and issued by Ginnie Mae. In almost all cases, the securities carry a double guarantee, with the other part coming from the FHA. Typically, institutional investors looking for a fairly predictable cash flow purchase the bonds.

Reverse mortgages aren't immune from challenges. If economic trends are any indication, however, this lending product's importance will only increase as aging baby boomers enter the next phase of their lives. Mortgage brokers looking to tap the market would be wise to move without delay.


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