Mortgage

As Technology X ages, reverse mortgage merchandise proliferate

While reverse mortgages make up only a small portion of the home loan market, the growing proportion of Generation X with high equity in their homes has inspired an increasing number of lenders to offer these products, bringing the eligibility age down to 55 in some cases.

The most common type of home conversion mortgage, or HECM, supported by the Federal Housing Administration, limits eligibility to anyone age 62 and over. This is a big potential market as home equity for those in this age group rose to $ 9.57 trillion in the second quarter of this year, according to the National Reverse Mortgage Lending Association / RiskSpan Reverse Mortgage Market Index.

But economic data on Generation X points to an even larger emerging market for reverse mortgages. A 2018 analysis by the Pew Research Center found that Generation X was the only generation whose home equity has recovered to pre-housing crisis levels. Because previous studies have shown earning potential already peaks at age 44 for women and 55 for men, the older ranks of Generation X – defined as those born between 1965 and 1980 – have entered the period when them from using their home value as a source of income later in life.

According to Michael Kent, president of Liberty Reverse Mortgage and co-chair of the board of directors of the National Reverse Mortgage Lending Association, a reverse mortgage can be an effective retirement planning tool that extends the life of the asset over time.

“To wait until you retire and then say,“ Oh, that's a good idea, ”that's great. You can still work it into your retirement plan, but if you could have this pre-retirement tool as planned, even better, ”he said.

Reverse Mortgage Funding, which was among the first to offer a reverse product to 60-year-olds, lowered the legal age of its proprietary reverse mortgage product from 60 to 55 in August. The redesigned offering is available in the District of Columbia and 19 states that have legal requirements for a lower age limit, and was an evolution of the previous product to serve a wider audience.

"We've always wondered why someone would want to take their cash savings – or what may now be the lower cash flow – and convert them into illiquid savings in their home," said Peskin, president of Reverse Mortgage Funding.

The idea for the redesign arose from the observation of an increasing number of over 55 senior citizens' communities.

"We have a lot of inquiries from builders and homeowners who are in these communities whether they are already there or are considering buying there to access the product," said Peskin. "And that is exactly what led us to say that we really have to work on a product that does justice to this larger market."

Some countries, like the UK and Canada, offer reverse mortgages as early as 55 years of age and consider them to be a kind of pension grant, according to Kent.

“That takes some pressure off the government. It offers tax-free income, ”he said. "It's also a great way to transfer wealth between generations instead of waiting for someone to die."

The Federal Reserve found that since early 2020, America's Generation X real estate capital has grown by $ 1.7 trillion, as it did among baby boomers, even though Generation X is a smaller cohort. Currently, Gen X members hold $ 11.1 trillion in real estate capital compared to $ 15.2 trillion for baby boomers. During the same period, the share of Generation X in total home ownership rose from 30.5% to 31.8%, while the share of baby boomers fell from 43.9% to 43.5%.

Reverse Mortgage Funding's most recent product announcement came after Finance of America unveiled its own hybrid loan for borrowers 60 and older earlier this year, a new offering to complement its more traditional proprietary reverse mortgage for the same age group launched in 2014 . The hybrid product combined elements of traditional and reverse mortgages.

Surveys have consistently shown that people over 55 prefer to age on the spot. Reverse mortgages are one possible means of achieving this goal, or even raising capital for a second home. Since homeowners can avail themselves of a reverse mortgage loan that they can use as they please, the proceeds could also serve as rainy day allowance for unexpected loss of income such as those experienced by many during the COVID-19 pandemic.

However, the products also come with risks, including high acquisition costs, which reduce the homeowner's equity, and higher interest rates. And when taxes, insurance, and maintenance are included, the income may not be enough to meet homeowners' needs.

"The thing about a reverse mortgage loan is that it isn't always used properly," said Michael Branson Jr, vice president of All Reverse Mortgage, a company that only sells reverse products. His loan portfolio includes a small number of own mortgages with a minimum age of 60 years. Some borrowers turn to a reverse mortgage for short-term payment relief that will give them time to get a home on the market.

“It's not intended for that. It's not the best way to go, but some borrowers still make that choice, ”he said.

And what at first seems like a high-quality offer could also become a headache in the long term if poorly planned.

"It's hard to plan what that stock position will look like over time, say 55 years old," said Branson. “If you opted for a maximum loan value at the age of 55, a higher interest loan – your life expectancy – you could stay in this property for 30 years, maybe longer. So it will take a long time for this loan to come into effect. "

Declining profit margins in other channels prompted some larger lenders like Finance of America and Ocwen to maintain or expand their presence in reverse mortgage this year. Despite the many rules surrounding these types of loans that have led others to leave the reverse mortgage room, they see financial opportunity through diversified offerings.

While no company other than Reverse Mortgage Funding has developed products for older Generation Xers, several lenders have proprietary products for people 60 and older, including the American Advisors Group and Liberty Reverse Mortgage, a division of Ocwen's wholly owned subsidiary, PHH-Mortgage.

Liberty Reverse Mortgage began offering its proprietary reverse mortgage product in 2019. Kent said the decision to open up reverse mortgages to a slightly younger population who did not qualify for a traditional HECM made business sense when you measure both inquiries and bottom line.

"We are actually seeing interest in such products for people as young as their mid-50s," he said. "And then, as the market grew and matured, we were able to model financial performance as it would be if we had younger borrowers in those pools, and it worked well."

For some borrowers, these proprietary products offer the opportunity for more couples to be fully enrolled on a loan, according to Branson. Previous cases where only half of a couple qualified for a HECM loan resulted in prolonged legal troubles.

“The only nice thing about age 60 is when one spouse is older than the other. Let's say the husband or wife is 64, 65, but the other is 61. Well, that's what the 60 is really nice about because they don't have to worry about being a non-borrowing spouse – they actually can be a borrower, ”he said. "That's why we absolutely love this innovation."

Although Generation Xers aren't currently as large as baby boomers or millennials, they still make up 34.6 million households in the U.S. and are projected to outnumber boomers by 2028 than they did before the COVID-19- Pandemic, thanks to record price growth over the past 18 months. With the rapid influx of additional equity, Generation Xer quickly became a more lucrative market that mortgage companies could attract compared to just a few years ago.

"We estimate in the states where we launched it – approximately 2.7 million households may now be eligible for a product like this," said Peskin of Reverse Mortgage Funding's updated offering.

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