As aging in place has taken hold among older generations, experts say that the current market conditions have laid the groundwork for what is already shaping up to be a robust reverse mortgage market.
“With record levels of homeowners equity and a boomer generation that seems incredibly intent on aging in place, it seems kind of inevitable that we will see an increase in reverse mortgages over the coming years,” says Rick Sharga, executive vice president of market intelligence for ATTOM Data Solutions.
According to recent data from the U.S. Department of Housing and Urban Development (HUD), that increase has already begun.
The data, which CNBC reported on, showed that Home Equity Conversion Mortgage (HECM) loan volume climbed 26% in March. HECMs represent 95% of the reverse-mortgage market in the U.S., according to the National Reverse Mortgage Lenders Association.
While they provide a viable option for seniors to tap into their equity, Sharga notes that reverse mortgages come with “baggage” for some.
“This is one of those products that the industry and consumers both had some issues with some years ago, and the reputation of those loans really suffered and hasn’t fully recovered since then,” he says. “For years, the FHA was losing a ton of money on its reverse portfolio largely due to overinflated appraisal numbers on the homes they were issuing these loans on.”
There are additional risks as well, including exceptionally high upfront fees and the possibility of outliving your proceeds because of payout miscalculations.
Despite the drawbacks associated with the product, Scott Harkless, chief revenue officer for Texas-based Open Mortgage, thinks the market conditions are still particularly favorable for reverse mortgages.
“We are seeing a steady uptrend in reverse mortgage production both at Open Mortgage and in the broader industry,” Harkless says, adding that there has been more than a 35% increase in HECMs between the first quarters of 2021 and 2022.
Serving thousands of clients annually across 22 states, the multi-channel mortgage lender has recently announced that it would be “doubling down” on its existing reverse mortgage business segment amid a growing market.
“The most profound drag in today’s housing market is not higher mortgage rates; rather, it is constrained inventory,” Harkless adds. “While this is painful for home buyers and forward originators seeking to serve them, it also has the effect of raising home equity, which makes the reverse mortgage much more attractive.”
Homeowner equity soared in recent years to just over $27 trillion during the hot housing market of the past couple of years, according to Wall Street Journal reports.
Harkless indicates that more than $9 trillion in equity is tied to those over 62. He adds that 77% of the average retiree’s net worth is trapped in their home equity.
“High inflation has also impacted retirement goals and challenged those living on fixed incomes, making seniors search out new ways to make ends meet such as releasing their home equity through a reverse mortgage,” Harkless says.
While the uncanny home appreciation lends itself to the list of positives that are bolstering interest in reverse mortgages, Paul Hindman, managing director at Grid Origination Services, says that a potential shift in home values could pose a problem for the industry.
“When you have an average situation and home prices increase to the degree that they have, and a bubble is implied and that bubble deflates obviously, that is a problem for reverse mortgage lenders,” he says.
That’s primarily because homeowners who take out a reverse mortgage are locked into a value, Hindman adds.
Suppose lenders are locked into a value during a housing bubble, and the price erodes. In that case, Hindman says that could lead to an “upside-down situation” when the term of that reverse mortgage ends and that person either sells, refinances, or dies.
“But, they’ve got these things set up and established so strictly that they are protected in a volatile market but just not as volatile as the market is right now,” Hindman says.
While a reverse mortgage provides a viable option for seniors and retirees to tap into their equity, it ultimately takes a certain amount of homes out of the market.
“Seniors already have a heightened interest in aging in place since the pandemic, and now they are simply preparing their present home for the long term,” Harkless says. “Of course, the increasing reluctance of a senior to downsize or move is also contributing to the inventory problem, and I do not foresee this trend changing in the near term.”
Despite reverse mortgages limiting the amount of sellable property—which is in limited supply in today’s market—Sharga notes that the scenario is not a zero-sum game for the housing market overall.
“We will see inventory numbers increase as much as they would’ve if boomers had moved out in numbers closer to prior generations if they downsized or moved into retirement communities, or moved in with their adult children or whatever the other options were,” Sharga says.
He adds that homeowners using the reverse mortgage were already staying in place to begin with.
Danielle Hale, chief economist for realtor.com®, echoed similar sentiments, adding that the current uptick in reverse mortgage activity is indicative of a trend that has already been in play, rather than a new phenomenon dragging more people into that situation.
“The reverse mortgage is more a reflection of their intentions, rather than changing behavior, so I don’t think that will be a big departure from what we would normally see with a growing number of homeowners in those older ages where reverse mortgages can sometimes make financial sense,” she says.
Though Hale believes that reverse mortgages are a good way for homeowners to tap into equity, she also notes that there are some cons associated with the option, mainly locking in the homeowners to the home.
“You’re tapping into that equity and spending it down,” she says. “It’s not available in the future to you or perhaps the future generations.
That presents challenges to the extent that the housing market is still shouldering an insidious inventory crisis.
In past reports conducted by the National Association of REALTORS®, experts suggested that the growing number of outdated existing homes in the market that need renovation or rehabilitation is part and parcel of the housing supply crisis in the U.S.
Before the housing boom of the early 2000s and subsequent extended underbuilding, the report showed that one-third of the U.S. housing stock was more than 40 years old. By 2019, that number surged to more than 50%.
Since reverse mortgages are often used to supplement retirees’ income, that could worsen the pool of older homes that are falling out of viability for the buyer pool.
“Homeowners are staying in their home significantly longer than they were a decade ago,” Sharga says. “Ten years ago, the average length that someone stayed in a home was between five and seven years in the space of a decade, almost doubling to somewhere between ten and 12 years.”
