Thoughts on unleashing the market for reverse mortgages

There could be a need, but this kind of loan can be complex.

The need for a robust reverse mortgage market is large and growing. At the end of 2015, there were about 24 million homeowners ages 65 and older, and that number is 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 home equity conversion mortgage, or 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 this?

Some senior 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 could be some combination of fear, ignorance and distrust.

The deterrents

The principal fear is losing their house, which has a little 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 online, many of which are misleading, and from the advertisements of lenders, which in many cases are worse.

Misinformation 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.

A shoppers market

A shoppers’ market is one that meets the following conditions:

■ Consumers know and can specify exactly what product or service they want to buy.

■ 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.

I recently 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 agreed.

None of the three features of a shoppers’ market is 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 the prices charged by the lender.

The prices available to HECM borrowers are also obscure. Aside from my site, there is 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.

None of the three features of a shoppers’ market is 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.