Reverse Mortgage Guide

HUD has come out with an interesting reverse mortgage study, A Turning Point in the History of HUD’s Home Equity Conversion Mortgage Program.

The bottom line is that despite terrible problems in the mortgage marketplace, the demand for reverse mortgages remains strong. In basic terms,

Prospects for Future Growth

Reverse mortgage lending in the United States is poised for considerable growth. First, demographics show that the number of eligible elder households is much larger than the volumes of reverse mortgages that already have been made. Demand for reverse mortgages would remain high based on this fact alone. The number of eligible elder households is expected to grow rapidly, however, as increasing numbers of the baby boom generation reach the minimum age of 62. Not only will the new generation of senior homeowners be larger than its predecessor generation, it is likely that they will also be less averse to debt and more willing to use reverse mortgages.

To put the numbers in perspective, according to the national sample of the 2005 American Housing Survey, there were 17.8 million owner-occupied units with elderly householders (age 65 or older); of these, 14.8 million represent potential HECM borrowers—12.1 million had no outstanding mortgage, and 2.7 million had outstanding mortgages that totaled less than 40 percent of their home’s value.3 Offsetting refinements to this 14.8 million estimate would add in homeowners with primary householders between the ages of 62 and 65 and subtract those who would be unlikely to apply because they have spouses under the minimum qualifying age of 62 or have homes that would not qualify based on condition. Furthermore, the Joint Center for Housing Studies of Harvard University projects the number of owner households with heads ages 60 to 69 will increase by 53 percent between 2005 and 2015 (Joint Center for Housing Studies, 2007). The Joint Center’s projection captures the early wave of baby boomers entering their eligibility years for reverse mortgages.

As the baby boom generation ages, demand for reverse mortgages may also rise with the demand for long-term medical care services, which is also growing rapidly. Already a major expense for state governments, Medicaid programs are being targeted for cost-control efforts. In this tight fiscal environment, home equity could play an important role in reducing government expenditures for long-term care. The National Council on Aging reports that increased use of reverse mortgages for long-term care could result in substantial savings to Medicaid by 2010, depending on the future take-up rate for these loans (National Council on Aging, 2005). These estimated savings result from the additional cash available to reverse mortgage borrowers that could delay or even prevent their need for Medicaid assistance for nursing home care and, at the same time, afford these older Americans more choices in less costly home-based health care.

Thus, 2008 does indeed appear to be a turning point for HUD’s HECM program: the volume of HECM originations has exceeded 100,000 a year, the secondary market for HECM continues to develop, the first baby boomers become eligible, and long-term healthcare demands fuel reverse mortgage demand. The next several years could be very dynamic for reverse mortgage activity in general and for HECM in particular.

Notes

1 Note that the rate of HECM growth has slowed during 2008, possibly due to lender liquidity constraints related to conditions in the secondary mortgage market and falling home prices in some markets affecting consumer demand. As the secondary mortgage market for HECM rebounds, and as home prices stabilize, these temporary disruptions in supply and demand are likely to dissipate.

2 For fiscal year 2008, the HECM subsidy rate is negative 1.9 percent.

3 Because HECM must be in a first-lien position, homeowners with existing mortgages must pay them off or subordinate them to the HECM. Homeowners with existing mortgages up to 40 percent of home value are more likely to be able to pay off the existing mortgage with the proceeds of a HECM (depending on the available principal limit) than those with existing mortgages more than 40 percent of home value.

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This entry was posted on Tuesday, July 22nd, 2008 at 6:20 am and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.