Aging Baby Boomers Should Spark Reverse Mortgage Demand
Reverse mortgages are financial resources for people age 62 and older that enable them to increase financial flexibility by tapping into home equity for extra cash. The post-WWII “baby boom” generation is starting to reach that demographic. See where this is going?
More and more seniors are opting for these loans, and no longer out of basic necessity. The typical borrower used to be the elderly widow with limited cash but a valuable property - an applicant whose primary goal was to make ends meet and remain in the home. Other common uses for the funds include home repairs / remodeling, medical expenses or in-home care, and repayment of other forms of debt.
Now, however, as reverse mortgages gain popularity, borrowers are younger and using the money to improve lifestyles during longer retirements.
One such case is Robert Simmons, a 67-year-old retired Long Island man who recently took a reverse mortgage on his home of more than 20 years, using the money to pay down his remaining loan, close a credit line for home repairs and buy a car.
“I wasn’t struggling to pay bills, but I needed just the extra boost to give me a good cushion so I could do nice traveling and have an enjoyable time in my declining years,” Simmons said. “Before I go out completely, I want to see something.”
Loans can be taken as lump sums, fixed monthly payments, a home equity line of credit or a combination of these options. Homeowners keep title to their houses and the mortgages are not repaid until borrowers move or die. The repayment cannot exceed the home’s value. Reverse mortgage demand has been doubling annually, and this month, the U.S. Housing and Urban Development Department (HUD) expanded its counseling network to address the high number of applications.
In the coming months, a Congressional subcommittee will also debate a bill eliminating a cap on the amount of reverse mortgages insured by the Federal Housing Administration (FHA), the agency that insures 90 percent of all U.S. reverse loans. Proponents of lifting the cap say that it would protect seniors from possible fraud by increasing the amount of federally insured reverse mortgages.
A GENERATION WITH NO AVERSION TO DEBT?
Experts say lenders and borrowers will get more creative now that baby boomers are nearing reverse mortgage eligibility. Michael Fratantoni, senior director of single-family research and economics at the Mortgage Bankers Association, says conventional wisdom points to the group having no inhibitions of increasing its debt.
Home prices have surged by double digits annually all decade and many homeowners have built a great deal more equity. Low mortgage rates and larger loans are appealing to younger borrowers. Uses of home equity are also adapting to new borrower profiles, as the standard applicant becomes one in search of discretionary spending rather than necessity.
To illustrate the rising demand, industry analysts say that less than 1 percent of seniors 65 or older now have reverse mortgages, but predict 5 percent should by 2010. Experts warn that these loans should be avoided if users plan to move before benefits exceed closing and other costs. There is also concern that borrowers reserve or use funds prudently rather than for investment or frivolous purchases.
The risk to investors, namely Fannie Mae, which buys reverse mortgages (also known as home equity conversion mortgages) from lenders, is offset by the FHA insurance on those loans.
“Whether the borrower outlives the actuarial models that are pricing the loan, whether the house goes down in value or interest rates go through the roof and the loan balance grows greater than the value of the house — in all those instances there is no risk to Fannie Mae,” said Jim Mahoney, chief executive of Financial Freedom Senior Funding Corp.
