The reverse mortgage industry is innovating like never before to get ahead of a burgeoning financial crisis that’s unfolding in the U.S. More than 10,000 baby boomers reach retirement age every day, and many of them enter this chapter of their lives with significant debt and little to no savings.
Innovation is needed to help address these challenges and serve this massive demographic. The good news is that retirement-focused loans that combine the aspects of forward and reverse mortgages are being introduced to help cash-strapped retirees tap into their home equity.
Mortgage originators should explore these financing vehicles for the good of their client base and their business. These loans offer alternatives to older homeowners beyond the federally insured Home Equity Conversion Mortgage (HECM), which accounts for more than nine in 10 reverse mortgage originations in the U.S.
A 2019 survey from GOBankingRates found that 46% of respondents had no retirement savings while 19% said they would retire with savings of less than $10,000. Additionally, more than 40% of all Americans heading into retirement have mortgage debt, and a substantial portion of this group spends 30% to 50% of their monthly income on housing expenses, according to a 2020 study by the Wharton Pension Research Council at the University of Pennsylvania.
For many retirees, home equity is the only source to fund their retirement. A traditional refinance or a reverse mortgage may not be the best option for many of these borrowers. Many wouldn’t qualify for a reverse mortgage anyway. According to the Wharton paper, more than 800,000 mortgage applicants over the age of 62 were denied in 2018 alone because their debt-to-income ratio was too high.
Times as well as consumer needs are changing, however. The mortgage industry is evolving to meet this moment through innovative products that allow borrowers who would otherwise not qualify to access their home equity through a safe, secure and well-planned retirement strategy.
Rising home values
Home equity continues to serve as the primary source of net worth for many Americans while the number of people who own homes is once again on the uptick. According to the Federal Reserve, the U.S. homeownership rate increased from a low point of 62.9% in second-quarter 2016 to 67.9% in second-quarter 2020. This trend contrasts sharply with declining homeownership rates from 2004 to 2016.
Fed research also indicates that the nationwide median net housing value (the home value minus all mortgage debt) rose to $120,000 in 2019, up from $106,000 in 2016. This means that a growing pool of retirees is becoming more reliant on their home as their primary retirement asset — and these assets are appreciating.
For a new generation of retirees, and possibly for generations to come, success or failure in their retirement will hinge on their ability to turn their home equity into liquid assets. This makes new mortgage solutions a genuine consumer need.
Best of both worlds
The solution needed to address the budding retirement crisis may not look like the traditional reverse mortgage. A HECM can be a good option for borrowers with plenty of equity in their homes, while proprietary loan options are ideal for homeowners with higher home values.
But these financing tools aren’t ideal for a large group of potential borrowers. Their circumstances call out for new mortgage products and creative thinking to keep retirees in their homes and serve consumers who don’t qualify for other options.
An innovative approach involves crafting a retirement mortgage that allows borrowers to refinance into a lower monthly mortgage payment for 10 years before eliminating the monthly payment from year 11 on. In a sense, this combines the advantages of forward and reverse mortgages.
Since many applicants don’t qualify for a reverse mortgage, this retirement loan product can serve as an alternative to a typical rate-and-term refinance. It also makes it possible to tap equity and receive cash out in an upfront lump sum, allowing borrowers to free up funds without downsizing or committing to a traditional refinance.
Among the benefits of this option is that it doesn’t carry the large fees that typically accompany a reverse mortgage. Unlike a HECM, where the borrower has to be at least 62 years old, this loan can begin earlier during a borrower’s pre-retirement days, providing them with a lower monthly mortgage obligation and a greater ability to take steps toward full retirement. It changes the conversation and provides clients with a viable retirement option.
The emergence of these new loan products also means a new reality for mortgage originators, brokers and bankers. With interest rates for 30-year fixed loans slowly rising after being at historic lows for a prolonged period, the refi boom is likely to slow down. The bulk of borrowers who can benefit from a refinance have already done so. Originators will need to find new products to sell — as well as a new client pool — if they are to survive and thrive.
The good news is that the market for new equity-based loan products is vast. It corresponds with an untapped demographic of prospective borrowers. These products are less sensitive to interest rates since the borrower’s need for cash and relief from monthly payments often overshadow their concern about rates. These new products can complement what originators are already doing and open the door to clients who previously had no other mortgage solutions.
It’s also possible that these products will become a gateway to more conventional reverse mortgages. Enticed by a new product and its messaging, some borrowers may seek additional information and find out that they do indeed qualify for a HECM or a proprietary reverse mortgage product.
In the end, a fresh approach to mortgage lending with a new demographic means that originators can help a sizable number of borrowers prepare for retirement while providing them with financial security and long-term stability. For the real estate finance industry, it’s proof that creative thinking can yield tangible business opportunities and growth. ●