by Ricardo Cornejo, GEI Associate
Reverse mortgages have proved to be the ultimate safety net for homeowner senior citizens as they walk into retirement without much cash into their pockets. Reverse mortgages provide monthly payments, a line of credit or a lump sum payment to the homeowner according to the value of their home at a relative ease of mind as no payment on the reverse mortgage loan is due until the homeowner leaves the home or passes away.
However, this paints a somewhat rosy picture for the homeowner evaluating future retirement plans. For some these types of loans are becoming a luxury in a sea of necessity. Many older Americans are underwater on their mortgages and cannot use their homes for what might have been, in better circumstances, an important source of income to make their retirement a dream come true.
The two most important conditions to be met in order to acquire a reverse mortgage are to be 62 years of age and have full ownership of a home. It may seem as if these two requirements are mutually achieved in the life of most seniors. But with a housing market that has not shown signs of bottoming out until recently, citizens of older age have become less and less likely to become eligible for a reverse mortgage.
Data released by AARP in July of 2012 highlights the effect that the recent housing crisis has had on senior citizens:
The age requirement to obtain a reverse mortgage is 62 and according to AARP, foreclosure rates for this age group, and the 65 to 74 age group, are lower than the rates experienced by the population that is less than 50 years old. An important observation worth noting, however, is that for the age group of 75 and older, foreclosure rates are higher than for any other senior age group. A study released in September of 2008, performed by Tonja Bishop and Hui Shan, evaluating the distribution of the borrowing age according to the year of loan origination for a Home Equity Conversion Mortgage (HECM), which is a type of reverse mortgage insured by the Federal Government, displays why this is an important factor to consider.
When the HECM loan products began originating in 1989, the average mean age of issuance was close to 73. Since then, the average mean age of origination has decreased to less than 70. The percentage of HECM loans originated early into retirement at 62 years old began increasing at the turn of the century and has continued to grow dramatically since then. The behavior observed also applies to Americans whom are 63 to 70 years old as the percentage of HECM loan origination for this age range has increased since 1999. Older Americans seem to be using these types of reverse mortgages to go into retirement instead of using them during retirement as it was their previous, more precautionary intent. The observed behavior heightens the impact of high foreclosure rates on senior citizens as, for some, it could be the only other alternative to social security benefits or rapidly depleting retirement investment accounts.
A closer look at how foreclosures have affected seniors in terms of their income levels proves this point further:
AARP estimates that just under two-thirds of all of the foreclosures experienced by citizens 50 years old or older in 2011 occurred for those whose incomes were between $1 and $74,999. This part of the middle class could be the one that is in most need of opting for a HECM or another type of reverse mortgage as it may be the case that seniors in this income range depend significantly on social security benefits for a monthly income.
Demand for HECM or other kinds of reverse mortgage loans could have been much higher than the number of loans currently originated, but because 3.5 million seniors are said to be underwater on their mortgages, they cannot obtain a reverse mortgage. The Great Financial Crisis has removed millions of potential participants from this market.
Imagine the remorse felt by one in his 60s who borrowed and spent $200,000 against the equity in his home 6-8 years ago and now finds that the formerly $250,000 valuation has shrunk to $150,000. Now in his 70s, he not only has no equity to fund his retirement but is also saddled with a large monthly debt repayment for his possibly lavish spending just a few years ago. No wonder that foreclosures are high even for seniors.
Information on HECM loans originated in the last few months could provide evidence of a decrease in the amount of seniors that opt for a reverse mortgage. HECM loans reached a 15 month low in March of 2012 amounting to 4374 loans:
The origination of HECMs is down even more drastically from the housing bubble years. From fiscal year 2009 to fiscal year 2011 the number of originations declined by more than 60%.
HECMs are perhaps the safest kind of reverse mortgages as the Federal Government provides insurance on loans amounting up to $625,500, meaning that, in the case that the homeowner passes away and selling the property does not cover the loan amount, the insurance provides for the remainder or the loss. HECMs or reverse mortgages of other sorts are not entirely safe for the lender, however, as the borrower could default on the reverse mortgage loan. After all, a main requirement for reverse mortgage loans is to be up to date on property tax payments and insurance premiums. If this requirement is not fulfilled, the borrower will have to default on the loan, and the lender may be in the obligation to foreclose on the loan. This particular issue has recently taken importance within the population of seniors that have chosen this financial product and opting for a lump sum of cash that is then used to pay for debt or other outstanding mortgages. Defaults on reverse mortgages amount to 46,000 currently in the United States. The defaults are nearly equal to half of the number of HECM loans that originated from January of 2011 to present date (almost 98,000).
According to HUD, there have been a total of 767,287 HECMs issued through June 2012. Of these, 586,340 are still active and 180,947 have been retired. I have not determined how many of the almost 181,000 retired cases were via foreclosure.
For many homeowners, the results of reverse mortgages are binary. These types of loans could signify peace of mind and relief to burning through a retirement account. On the other hand, reverse mortgages could be the last financial nightmare on earth during the last years of the borrower’s life for those who do not use them wisely.
- New Type of Reverse Mortgage Aids Retirees, GEI News, 19 April, 2012.
- Nightmare on Main Street: Older Americans and the Mortgage Market Crisis, by Lori Trawinski, AARP Public Policy Institute, July 2012.
- Reverse Mortgages: A Closer Look at HECM Loans, by Tonja Bishop and Hui Shan, September 2008.
- HECM Single Family Portfolio Snap Shots. United States Department of Housing and Urban Development, January 2011 – June 2012.
- Reverse Mortgage Madness, by Mark Miller, WealthManagement.com, 9 August, 2012.
- Reverse Mortgages Earn Scrutiny on State, Federal Levels, by Kim Lamb Gregory, Ventura County Star, 4 August 2012.
- Reverse Mortgage Default: It is Possible!, ReverseMortgage.net, February 2011.
- Home Equity Conversion Mortgages (HECM’s), HUD.gov