How to Unleash the HECM Reverse Mortgage Market - Part 1
The need for a robust reverse mortgage market is large and
growing. At the end of 2015 there were about 24 million
homeowners aged 65 and over, with the number growing by
about a million each year. The Center For Retirement
Research at Boston College estimates that more than half of
them “may be unable to maintain their standard of living in
retirement.” Yet the Federally-insured HECM program has
barely dented the problem. Fewer than a million HECMs have
been written in total since the program began in 1990, and
the current annual rate is only about 60,000. Why is
owners don’t need them, of course, and some others attach
high importance to leaving a debt-free home to their
children. But leaving those groups aside, there are millions
of others whose lives would be enhanced by a HECM, who don’t
care a fig about enlarging their estate, but who desist
nonetheless. The reason is some combination of fear,
ignorance, and distrust.
Deterrents: Fear, Ignorance,
fear is losing their house, which has a smidgen of substance
because HECM borrowers can be foreclosed on if they don’t
pay their property taxes or their homeowners insurance, or
if they don’t maintain the property. These obligations, and
the danger of foreclosure if they violate them, are the same
as those on a standard mortgage. The difference is that a
borrower with a standard mortgage can lose her house by
defaulting on the monthly payment, and this accounts for
almost all foreclosures on standard mortgages. HECM
borrowers, in contrast, have no required payment and no
default risk. If they pay their taxes and insurance, their
tenure is secure until they die or move out of the house
permanently, but that simple message doesn’t always get
through to seniors who don’t understand how HECMs work.
Ignorance of HECM reverse
mortgages is widespread because HECMs are complicated and
very unlike the standard mortgages with which most seniors
purchased their homes. While there is no shortage of
reliable information on the subject, such as the recent
monograph by Shelley Giordano (What’s
the Deal With Reverse Mortgages?),
most seniors get their information from articles that they
read in popular media and on-line, many of which are
misleading, and from the advertisements of lenders, which in
many cases are worse.
is part of a larger problem, which is a dysfunctional market
structure. The market for HECMs can best be described as a
“gotcha” market in which distrust is a major by-product. A
gotcha market is very different from a shoppers market.
Characteristics of a Shoppers
market is one that meets the following conditions:
and can specify exactly what product or service they want to
The price of that
particular product or service is readily available from
sellers without any carryover obligation.
The consumer has
confidence that the seller selected will deliver the product
specified at the agreed upon price.
purchased a camera in a shoppers market. I specified the
make and model number to multiple sellers who quoted prices
for it without asking me any further questions, and I
selected a seller who I was confident would deliver it as
None of the three features of a shoppers market are found in
the HECM market. The product at issue is obscure because
seniors often do not know how they want to receive money
under the HECM – whether as upfront cash, monthly payments,
credit line, or a combination. And even when they do know
what they want, they have little idea how much they qualify
for, because that depends on their age, the appraised value
of their home and on the prices charged by the lender.
The prices available to HECM borrowers are also obscure.
Aside from my site, there are no published data on HECM
prices of individual lenders that is widely available in
multiple media, as there is for other well-established
markets, including the market for standard mortgages. With
few exceptions, lenders do not post HECM prices.
HECM borrowers may or may not be confident that the product
selected will be delivered at the agreed-upon price, but
they shouldn’t be because lenders in this market don’t lock
the mortgage price until shortly before the loan is closed.
Borrowers are vulnerable to lock abuse, though few of them
probably are aware of it.
Next week: The
characteristics of a gotcha market, and how to convert it
into a shoppers market.