Estimates indicate that there is a target population of some 8.8 million senior households that both qualify for and are good potential candidates for HUD's home equity conversion mortgage (HECM) reverse mortgage program. (Under an HECM loan, a lender advances money to an elderly homeowner, in the form of a lump sum payment, a series of fixed monthly payments, a line of credit on which the borrower may draw, or a combination of the three. The senior homeowner is not required to make any payments on the loan so long as he or she remains in the house. The homeowner is only required to continue paying property taxes and insurance. The lender collects the loan balance -- which includes the accrued interest and other charges as well as the amounts paid out -- when the house is sold or the owner dies.) Yet in the most recent federal fiscal year, just 43,131 HECM loans were originated; over the 16-year history of the program, a total of 162,268 HECMs have originated, representing only a tiny share of the potential market.
There are some obvious and tangible factors that help explain this low market penetration, most notably the high origination fees and closing costs relative to amounts that can be borrowed through the program. Less obvious are the intangible psychological fears that may prevent senior homeowners from stepping into a reverse mortgage. Being aware of these factors can help potential borrowers more clearly assess their own situation and make a more calculated decision about whether or not a reverse mortgage is right for them:
Most elderly homeowners have spent their working lives focused on the goal of "paying off the mortgage." Taking out a reverse mortgage is, in essence, a decision to do a complete turnabout and initiate the process of growing a new mortgage. For some seniors, this just does not make sense, no matter how rational the decision to trade-in home equity for better living standards in later life may appear to a detached observer.
HECMs are administered, heavily regulated and insured by federal government agencies (in particular HUD). From the standpoint of protecting innocent borrowers from ruthless lenders, HECMs are about as "safe" a mortgage product as can be imagined. Yet there are true horror stories from the pre-HUD reverse mortgage era about seniors being forced to sell their homes or lose them to foreclosure. Unfortunately, these stories have now become urban legends and still taint the phrase "reverse mortgage." A related issue is the ongoing problem of elderly homeowners being contacted by "home repair" companies, annuity salespersons, and other pitch-men promoting the reverse mortgage as the ideal way to pay for their valuable product or service. The tacky nature of this type of solicitation further increase doubts and fears about whether reverse mortgages are truly legitimate.
There is no question that reverse mortgages are complex financial tools. Moreover, by their very nature they run counter to many of the golden financial management rules that senior homeowners have strived to abide by over their adult lives -- i.e., "reduce debt," "avoid high transaction fees," "grow your home equity," etc. Largely because of the complexity, HUD requires all HECM applicants to participate in counseling sessions to ensure they have full understanding of the reverse mortgage process and the other alternatives that may be available. Yet, while necessary and well-intended, the counseling requirement itself may scare-off some potential applicants who feel that they just will not be capable of digesting all the new information presented.
For many seniors, the desire to leave an inheritance to children or grandchildren is quite strong -- even to the point of accepting a more modest than necessary lifestyle to ensure that an estate survives them. Seniors, who have this goal and whose largest asset is their homestead, clearly will perceive that a reverse mortgage runs directly counter to their strong bequest motive.
To a large extent, further growth in the reverse mortgage area will depend on the success of efforts to educate the target population. Some observers feel that the next generation of retirees -- baby boomers -- will enter their retirement years with a far greater understanding of financial matters and with less aversion to indebtedness. This may prove true but the reverse mortgage concept is so fundamentally different from what people are used to that overcoming the fears of potential borrowers will remain a challenge.
To be a sensible financial decision, a reverse mortgage should equate to a conscious decision by the homeowner to stay put for the long term -- minimally 5-7 years and, ideally, for the rest of the homeowners' lives. Obviously, this commitment is especially difficult for the elderly homeowner. Death, long-term illness or incapacity and similar issues weigh heavily on the minds of many seniors and make long-term housing commitments especially stressful.