Are more seniors, baby boomers and even advisors taking a fresh look at reverse mortgages? Perhaps.
A recent study by the MetLife Mature Market Institute found that younger seniors are now seeking a Home Equity Conversion Mortgage (HECM), otherwise known as a reverse mortgage (RM).
In 1990, the average age of a reverse mortgage borrower was nearly 77; in 2010, it stood at 73, according to statistics from the U.S. Department of Housing and Urban Development (HUD).
MetLife’s report, “Changing Attitudes, Changing Motives: the MetLife Study of How Aging Homeowners Use Reverse Mortgages,” done in conjunction with the National Council of Aging (NCOA), uncovered a similar downward drift. Between September and November 2010, the average age of homeowners who went through the required counseling for a reverse mortgage was 71-and-a-half years old. Furthermore, nearly half — 46 percent — of homeowners considering a reverse mortgage are under age 70. Contrast that to the 1990s, when the age of the typical reverse mortgage borrower ranged between 75 and 76, reports MetLife.
Even baby boomers are casting an eye toward reverse mortgages now. According to MetLife, the percentage of prospective RM borrowers in the 62 to 64 age group has climbed 15 percentage points since 1999, despite the fact that younger applicants have had lower available loan limits.
Why the shift? Blame the recent recession that has devastated many a retirement portfolio. Another reason is simply that baby boomers are beginning to reach the age (62) when they can qualify for a reverse mortgage, points out Barbara Stucki, Ph.D., vice president for home equity initiatives for NCOA in Washington, D.C.
They also have endured a historic economic meltdown and therefore, are looking to their home equity as a means to lift themselves out of dire financial straits, she adds.
Statistics from the MetLife study underscore that trend. A clear majority — 67 percent — undertake a reverse mortgage as means to reduce debt, an indication it’s needed to meet an immediate financial need. In contrast, back in 2006, an AARP study on reverse mortgages cited by MetLife found that 70 percent of respondents did so to improve their quality of life. Another 73 percent cited the need to plan ahead for unexpected emergencies.
In other words, there appears to be a perfect storm brewing: Baby boomers are qualifying for the program at a time when they need to restock their retirement portfolios. But are consumers and advisors ready to take advantage of RMs? Possibly not. In Senior Market Advisor’s 2012 Senior Survey, roughly 86 percent of respondents had no interest in pursuing a reverse mortgage.
“Orderly draw down”
Most financial planners are not big fans of reverse mortgages, either, or at least weren’t until recently. Stucki says that is understandable, given that the goal of a financial advisor is to preserve a client’s assets. “So by definition, they’re not going to want to tap into the home,” she says.
However, two factors have come into play that should make an advisor more open to a reverse mortgage: a volatile stock market and increasingly longer life spans, Stucki says.
“A lot of financial advisors are still recommending that a home equity loan in general and reverse mortgages in particular only be used as a last resort,” she says. “I think it’s very important that financial advisors look carefully at whether this is the best advice to give their clients.”
Instead of focusing solely on asset preservation, an advisor should also aim for an “orderly draw down” of assets to mitigate longevity risk, Stucki says. “Home equity will need to be part of the solution.”
Rick Kahler, president of Kahler Financial Group in Rapid City, S.D., says that he has sensed more “openness” on the part of financial advisors like himself to recommending a reverse mortgage to clients in certain situations.
“I look to reverse mortgages as a way to take equity out of a home,” he says. “And certainly the boomer generation is going to desperately need a product like that because they have woefully under-saved.”
If done in the right circumstances, a RM could reduce the withdrawal rate on a homeowner’s retirement portfolio, especially if it can pay off an existing mortgage. “Let’s say we’ve got a withdrawal rate of 8 percent. If I can use [the reverse mortgage] to reduce that to 4 percent, that can be a huge win,” Kahler explains.
If there is enough equity left in the home, the reverse mortgage can also provide a monthly income or lump-sum payment to the mortgagee, he adds.
For baby boomers in particular, a reverse mortgage on perhaps their largest asset — their house — may be a viable option.
“We try to plan for people taking the home off the table, not even using the home equity in the plan,” Kahler says. “Unfortunately for most boomers, this is not going to be the case. For the boomer generation, the home factors in as probably the largest asset that they have. And I think it behooves advisors to become skilled in when to use a reverse mortgage and when not to and at least entertain some of the advantages that you can have with a reverse mortgage.”
In Kahler’s view, reverse mortgages are best suited for someone in good health and who intends to stay in their home for at least 10 years. A client at an advanced age or a person in poor health would not be a good candidate.
“Different strategies for different needs”
Jim Heitman, owner and founder of Compass Financial Planning in Alta Loma, Calif., relates that he has used a reverse mortgage in the past with clients to generate enough cash to pay for a specific purpose, such as upgrading a home with ramps and hand rails so an elderly person can live there independently.
“I don’t like to use them for cash flow,” he says. “But sometimes it’s just necessary. A little old lady living on nothing but Social Security, but she has a $200,000 home. Go ahead and tap into it. For people to be able to continue to be self-sufficient in their own homes does so much for them. It increases the quality of life. And for older people who simply don’t have any other access to cash I think it works.”
Rather than regarding reverse mortgages as a last-ditch solution, advisors can view them as one piece in an overall portfolio management strategy, Stucki recommends. For instance, say a client wants to maximize their Social Security benefits but can no longer work. Utilizing a reverse mortgage can act as a bridge until they can access Social Security, she explains.
Plus, there are several options for how a reverse mortgage can be paid out: lump sum, line of credit or a term payout. “There are different strategies for different needs,” Stucki says. “To the extent that somebody is taking a reverse mortgage out as a line of credit to increase their liquidity in case of financial emergencies, there’s probably not a lot of risk because it’s being used very prudently. The bigger challenge, and what we’re seeing with the boomers, is that a lot of folks are taking out a reverse mortgage in order to deal with very large financial challenges. And so they’re taking out a lump sum. That’s the big shift.” In the latter instance, a borrower could deplete their home equity rather quickly, Stucki adds.
“Another arrow in the quiver”
Although a new lower-fee RM model, the HECM Saver, has been introduced, the cost of a reverse mortgage can be high, Heitman maintains. He says the negative view of reverse mortgages may derive from sometimes deceptive advertising aimed at seniors.
“The rates are higher,” he says. “The mortgage company is taking on more risk and I get that. But do the fees really need to be that much higher than a normal line of credit? A lot of seniors have a negative view and I can understand that. The commercials sound so great, right? And then they get in and there’s this fee and that fee, and they’re $5,000 out of the equity of their home just to cover closing costs.”
More accurate advertising and cranking down fees to make them more in line with the rest of the mortgage world would make a reverse mortgage a more popular product in the public eye, and among advisors, Heitman says. “And then be honest about whether or not a reverse mortgage makes sense in a situation. Every legitimate financial product — and a reverse mortgage is a legitimate financial product — have a place where they fit,” he says.
Kahler agrees there are times when a reverse mortgage can be a part of a well-thought-out financial plan, not simply an option of last resort. “Rather than treating a reverse mortgage like the plague,” he says, “advisors should think of it as another arrow in the quiver.”
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