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 most reverse mortgages made in the U.S. To date, more than 900,000 HECMs have been originated in the U.S., including 52,000 in the most recent federal fiscal year, ending September 30, 2014.
The popularity of reverse mortgages can be attributed to several factors, including greater consumer awareness of, and comfort with, the product, but more importantly, increasingly tighter budgets caused by rising healthcare costs and lower returns on investments.
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 that there are about 27 million senior homeowners today, and that number will rise in the future.
While seniors have tremendous amounts of accumulated equity in their homes, they also have the lowest median income of any demographic group ($31,354 for seniors, and $55,821 for all homeowners) nationwide. 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 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.