As the economy slowly recovers, reverse mortgages are still the best financial solution for millions of older Americans.
Reverse mortgages bounced back in 2013 in their best showing since the Great Recession in what some analysts says is tied to demographics and improvement in the housing market that should continue.
Industry publication Inside Mortgage Finance reported that borrowers took out 20 percent more loans in 2013 compared to 2012 and reached $15.3 billion. That’s still below the record of $30.2 billion in reverse mortgage loans in 2009, the publication reports.
In a reverse mortgage, homeowners 62 and older receive a loan backed by the equity in their homes. The lender isn’t repaid until the home is sold.
“I think the reasons are twofold,” says Marla Mason, a certified financial planner and vice president of Presidential Brokerage in Denver. “It’s the housing market bouncing back where people saw the value of their homes going back up. It made the numbers more attractive for how much equity they had in the home so they can get a higher amount for the reverse mortgage. Second, we’re starting to see an acceleration in the number of baby boomers hitting retirement.”
Whether those people took retirement because of age or the economy, Mason says many people are looking to put a reverse mortgage in place even if they’re not drawing from it right away.
Not everyone, however, shares the view that the increase is primarily due to demographics and the rebounding of the housing market. Some financial planners and reverse mortgage observers say new federal rules that went into effect at the end of September and additional rules that go into place in April, have contributed to reverse mortgages increasing because people wanted to qualify under those old rules.
Last September, new federal rules prohibited people from getting as much cash all at once. In April, new qualification rules incorporate credit scores, although some analysts say it’s not known how strictly qualification rules will be enforced.
Amy Ford, director of home equity initiatives for the National Council on Aging, one of the agencies that provides federally-required counseling for people doing reverse mortgages, says any time there’s a pending policy change in reverse mortgages, the industry sees an increase in volume.
“With the change on the horizon, some seniors may be seeking to access a reverse mortgage now instead of waiting for the pending policy changes to emerge,” Ford says.
In the past, credit score and repayment qualifications weren’t really considered, says Sean Keating, a certified financial planner and principal of New Jersey-based Patriot Financial Advisors who also admits the housing rebound has boosted equity that has made more people qualify. “They just looked at the value of the home. Now, it’s going to force people to qualify. If someone on Social Security needs to take out $300,000 to save their house, they aren’t going to qualify if that’s their only source of income and if they have a 500 credit score. That wouldn’t have impacted them at all in the past, and now it will.”
Mason says, however, the rules changes may have had a minimal impact at most because the vast majority of people applying were “probably in a reasonable spot anyway” unless they were forced out of their jobs. Even if they’re credit scores are decent, they’ll qualify, she says.
Many analysts like Mason say they don’t see the reverse mortgage numbers slowing despite the new rules.
Mary Smith, the director of marketing at Liberty Home Equity Solutions, says the firm expects the reverse mortgage market to continue to grow as a result of the expanding senior population with about 10,000 baby boomers turning 65 every day.
Reverse mortgages are gaining broader acceptance among consumers and financial planners as a smart financial option for funding retirement, Smith says. Taking out a reverse mortgage loan with a line of credit option gives homeowners access to a portion of their home’s equity as they need it. Financial Planners are also starting to look at the reverse mortgage as a new way to help their clients reduce portfolio spend-down risk, she says.
“We’ve seen recent growth in two important segments of the market which we believe will fuel future growth,” Smith says. “First, we’re seeing a growing number of consumers who are using a reverse mortgage as part of a retirement planning strategy rather than to meet immediate needs for income or cash flow. They may have paid-off their homes and are comfortable financially and are choosing to take out a reverse mortgage for added financial security.”
Based on conversations with prospective customers, we’re finding that more and more customers, especially baby boomers, are looking into a reverse mortgage because the traditional sources of retirement income (social security, pensions, savings) aren’t enough to give them the security they need in retirement, Smith says.
“While many seniors may be financially comfortable today, they also worry about what may happen to their expenses and savings in 10 or 15 years from now and want to be as prepared as possible,” Smith says.