The Importance of Reverse Mortgages From a Business and Public Policy Standpoint

Interest in the reverse mortgage program has grown dramatically as lenders and brokers have looked to expand their product offerings.

Reverse mortgages not only provide additional fee income, they also offer lenders a way to promote community stability, receive favorable publicity and credit under the Community Reinvestment Act (CRA).

Reverse mortgages have been around in one form or another since the early 1960s. The product remained in relative obscurity until 1990 when the U.S. Department of Housing and Urban Development unveiled the federally-insured Home Equity Conversion Mortgage (HECM). The sector got another boost six years later when Fannie Mae launched its own reverse mortgage product, the Home Keeper.

The HECM currently accounts for all reverse mortgages made in the U.S. To date, more than 550,000 HECMs have been originated in the U.S., including 112,000 in the most recent federal fiscal year, ending September 30, 2008.

The surging popularity of reverse mortgages can be attributed to several factors, including 1) greater consumer awareness of, and comfort with, the product, 2) increasingly tighter budgets caused by rising healthcare costs and lower returns on investments; and 3) more lenders offering the product.

Future Demand for Reverse Mortgages
Today, over 34 million Americans are over age 65. This is expected to double in the next 30 years to almost 70 million. By 2030, 20 percent of Americans will be over age 65. Almost four out of five seniors own their own homes, meaning there are about 27 million senior homeowners today, and that number will rise in the future. Seniors of all races have the highest rates of homeownership.

Even so, seniors have a lower median income than any other demographic group ($23,311 for seniors, and $43,581 for all homeowners nationwide). Yet seniors have the highest median home equity ($80,000 for seniors, compared to $57,000 for all homeowners and only $19,000 for homeowners under age 35). This indicates that conversion of home equity into income could significantly increase the relatively low incomes of senior homeowners.

This is obviously important from a public policy perspective. Seniors are a large and growing segment of the population. As seniors age, their incomes do not generally increase, while their needs do. Homes need repairs and accessibility improvements, chronic illnesses require ongoing treatment and expensive prescription drugs, cars wear out and must be replaced with more expensive ones, and people with declining mobility may need more daily help with household tasks.

Seniors who cannot afford these growing expenses either forego them—thereby, sacrificing quality of life, independence, and even their health—turn to families, who are often hard pressed to help; take out expensive home equity loans, which must be repaid on a current basis; seek government assistance; or sell their homes in order to access their home equity. Studies by AARP have shown that seniors will sacrifice considerable quality of life in order to remain in their homes for as long as possible.

Reverse mortgages offer an ideal way to avoid these dire consequences while maintaining seniors’ desired independence in their own homes. Seniors do not have to repay the loans until they die or move out of the home. They can never owe the lender more than the home is worth when the loan is due. They can use the money in almost unlimited ways, and with payment plans that can be tailored to suit their needs and financial goals. Reverse mortgages can also save the federal government money through reduced demand for health care and other benefits.

Proceeds from reverse mortgages can be used to pay for home repairs, cost-saving energy improvements, and improvements to accessibility that can prevent injuries; pay for ongoing in-home health care, so the senior can avoid expensive government-paid hospitalization or nursing home care; pay for one or more new or used cars, or a wheelchair-accessible van; pay for expensive prescription drugs that may not be covered by any government or private insurance plan; pay for motorized wheelchairs and other life-enhancing equipment that Medicare or private insurance may not pay for; and many other uses that can help seniors maintain their dignity, avoid asking hard-pressed children for help, and enjoy life.

Reverse Mortgages and the Medicaid Debate
The advantages for seniors, their families, and the government of a robust reverse mortgage program are clear. Congress has expressed great interest in the program, particularly its potential to help seniors afford long-term care, thereby helping to reduce the millions of dollars in eventual federal expenditures for seniors’ health care needs.

The Centers for Medicare and Medicaid Services, a federal agency within the Department of Health and Human Services, and the Robert Wood Johnson Foundation funded a study by the National Council on Aging (NCOA) that explores the potential of encouraging seniors to utilize their home equity to cover their long-term care needs. In 2000, the nation spent $123 billion a year on long-term care for those age 65 and older, with the amount likely to double in the next 30 years. Nearly half of those expenses were paid out of pocket by individuals and only three percent were paid by private insurance; government health programs pay the rest.

NCOA's report— titled Use Your Home to Stay at Home : Expanding the Use of Reverse Mortgages to Pay for Long Term Care— showed that reverse mortgages can help an estimated 13.2 million elderly homeowners pay for long-term care, allowing many to remain independent in their homes longer. Of the 13.2 million eligible households, an estimated 9.8 million currently have an impairment that can make it hard to live at home.

In total, these households could access as much as $695 billion in home equity through reverse mortgages. For individuals, the extra cash could go a long way to help with family caregiving and other long-term care expenses. For example, a 75-year-old homeowner living in a property worth $100,000 could receive enough funds to pay a family caregiver $500 a month for almost 12 years; $1,120 a month in adult day care services for almost five years; or $2,160 a month in home care—daily care for at least four hours—for 2.5 years.

Reverse Mortgage Alternatives
Some policymakers usually ask us whether there are alternative sources of income available to seniors, particularly home equity loans or trading down to smaller homes.

Home equity loans are often problematic for seniors on fixed incomes because homeowners are obligated to make monthly payments that their cash flow prohibits. In fact, many seniors could not qualify for loans that require current payments because they just do not have the income to qualify. The beauty of the reverse mortgage is that there are no monthly payments. Instead of the homeowner paying the lender, the lender pays the homeowner.

As far as the option of selling and moving is concerned, this can be problematic from both a financial and emotional perspective. It is important to recognize that a home, in many circumstances, is much more than merely an economic asset. I have visited seniors in homes with gardens nurtured for decades, woodshops, art studios, handmade built-in furniture and other irreplaceable features. Whether it is due to the physical attributes of the home, a sense of community, or the numerous memories contained therein, many seniors simply do not want to move.

From a financial perspective, if the costs of selling, including a typical broker’s commission (6-7%), closing costs on the new home, and moving expenses (not to mention the inconvenience of packing up 15-55 years of accumulated belongings) are calculated, a reverse mortgage might very well prove to be the more cost-effective solution. Furthermore, it would be quite possible for someone to outlive the “net proceeds” obtained from selling and moving—unless those funds are used to purchase an annuity or some other financial instrument (yet another fee).

With the reverse mortgage, on the other hand, lifetime income can be guaranteed, as long as the home is occupied, even if the amount provided eventually exceeds the value of the house.

A healthy, active reverse mortgage program could be a key component for helping seniors take control over their financial situation. Reverse mortgages are a promising way to unlock billions of dollars in home equity, providing financial security, independence, and great improvement in the quality of life for thousands of senior homeowners. Wider acceptance of reverse mortgages can mean reducing the need for costly increases in federal spending on health care and other benefits for seniors in the future.