Recent reports on the growing mortgage debt loads of U.S. seniors paint a pretty bleak picture, which should be of concern to reverse mortgage lenders. After all, the more debt you have on your house, the less equity you can extract from your home.
But reverse mortgage lenders are not deterred by these reports. For starters, millions of seniors still own their homes completely. Also, reverse mortgages can help many seniors better manage their mortgage debt.
According to a recent AARP study, the percentage of people with mortgage debt as they age and the amount they owe has increased steadily over the past 20 years. Among those between the ages of 55 to 64, the percentage of families who have a mortgage jumped to nearly 54% in 2010, from 37% in 1989.
But the AARP found the percentage of people already retired who still have a mortgage has jumped even higher. More than 40% of those 65 to 74 had a mortgage in 2010, compared to less than 22% in 1989. The largest percentage increase has been among those 75 or older: nearly a quarter of them still have a mortgage, compared to only 6.3% in 1989, AARP said.
Moreover, the amount of debt these individuals owe has exploded. According to the AARP, the median mortgage debt of those aged 55 to 64 nearly tripled between 1989 and 2010, to $97,000 from less than $34,000. The percentage increase among retirees was even higher. Among those 65 to 74, median mortgage debt more than quadrupled, to $70,000 from $15,400; among those ages 75 and older, it jumped to $52,000 from less than $12,000.
Needless to say, this state of affairs creates challenges for lenders in the reverse mortgage space. Seniors with a lot of mortgage debt and shrinking property values will have a much harder time qualifying for a reverse mortgage.
But it also creates opportunities. If people are still paying off a large mortgage as they approach retirement or after they've already stopped working, that leaves a lot less money available for day-to-day living expenses. For many of these people, a reverse mortgage could be a solution to their problems.
While the AARP figures are certainly unsettling, they don't tell the entire story. For one thing, these problems don't affect all senior homeowners, who, as a group, still have a lot of untapped equity built up in their homes.
According to the National Reverse Mortgage Lenders Association, senior home equity totaled $3.1 trillion in the second quarter of this year, based on the total home value of $4.2 trillion minus $1.1 trillion of mortgage debt. That's a much higher percentage of equity compared to all other homeowners.
The Federal Reserve has determined that total U.S. home value totals about $16.4 trillion, and mortgage debt totals $9.7 trillion, meaning homeowner equity equals less than 41% of the value of homes. If we subtract out the percentage owned by seniors, all other homeowners own $12.2 trillion of home value and owe $8.6 trillion, meaning they own less than 30% of their homes.
The AARP statistics ‘are not going to kill the reverse mortgage market,’ says Jeffrey S. Taylor, president of Wendover Consulting Inc. in Greensboro, N.C. ‘There are still a large number of seniors who own their homes free and clear. I wouldn't necessarily be strategically alarmed by seniors taking on more debt.’
Taylor notes that many people in their 50s and 60s have refinanced their mortgages recently into the lowest rates in decades. At the same time, many people in this age group – like many other Americans – are looking to reduce their debt, and a reverse mortgage could be a way for many of them to do that.
‘I certainly wouldn't advise my clients to get out of the business,’ Taylor says. However, he warns, ‘As an industry, we need to continue to push the ball up the hill.’
‘Many seniors are facing a growing percentage of their cash going to debt service,’ says Peter Bell, president and CEO of the NRMLA. ‘A reverse mortgage provides an antidote to that situation.’
Bell adds that for older homeowners with ‘onerous payments on their first mortgage, reverse mortgages are a vehicle for that’ – provided the reverse mortgage yields enough cash to pay off the first mortgage. ‘It really depends on the particulars of a given situation.’
Bell says he is seeing a shift in thinking among financial planners, many of whom in the past have been, at best, lukewarm about advising their clients to get a reverse mortgage. Now many are advising that their clients use a reverse mortgage more strategically, rather than as a last resort.
‘Retirees often have peaks and troughs in their cash needs, and the peaks often occur at inopportune times and they are forced to sell assets,’ Bell continues. ‘If they use a reverse mortgage they can hold onto their assets.’
Sue Pullen, vice president and senior mortgage advisor at Fairway Independent Mortgage in Tucson, Ariz., says that even if today's debt and equity figures look discouraging to some potential borrowers, this may not be the case tomorrow. She notes that the amount of cash a reverse mortgage yields is based on three factors: the age of the borrower, the interest rate and the value of the property.
‘If a reverse mortgage does not help the senior today, they should wait and try again,’ she advises. ‘Every year that the senior ages, and hopefully the value of their property increases and interest rates stay low, the senior will be able to realize more available funds.’
Pullen adds that lenders could boost the ability of many seniors to get reverse mortgages by agreeing to reduce current first-mortgage balances.
‘It would be great for lenders to modify existing loans to allow seniors to obtain a reverse mortgage,’ she says. ‘In this economy, it makes sense to me for an existing lender to lower the principal amount owed on a property, making the final payoff of the existing mortgage low enough for the senior to be able to obtain a reverse mortgage with no cash out of pocket at the closing table. Lenders are starting to write down principal on other borrowers, so why not in these cases?’
George Yacik is a Stratford, Conn.-based financial writer. He can be reached at email@example.com.