REVERSE MORTGAGE INFORMATION: Tools, News and Resources to Help Seniors Decide

As the march of baby boomers into retirement continues, the race is on in the financial industry to find innovative and cost-effective ways to unlock the enormous store of retirees’ home equity wealth in a way that doesn’t require regular loan payments. Estimates place the value of seniors’ home equity wealth at $3-$5 trillion and growing, so stakes are very high.

Reverse mortgages, in their many manifestations (HECM 1xx, Jumbo, HomeKeeper, etc., etc.), are the leading product at this point. They’ve been around for nearly twenty years now, are rapidly growing in popularity, but suffer somewhat from an image problem.

The Achilles heel of today’s reverse mortgage products is high costs (more…)

There’s no question that one of the main reasons for the rapid rate of growth in the reverse mortgage industry has been home price appreciation in “hot” areas of the country. Over the last several years, the top markets for HECM reverse mortgages have consistently been the California and Florida markets.

These markets also dominate the index of reverse mortgage friendliness, a simple measure that compares the interest rate on a reverse mortgage with average home appreciation rates. It’s a straightforward notion: when home price appreciation rates match or exceed borrowing costs, there is added incentive to tap home equity via a reverse mortgage. The homeowner can use the funds for living expenses and still grow the value of the estate. Refinancing a reverse mortgage is also a more palatable option when home values are soaring.

But what about when home values stagnate or decline (more…)

Reverse Mortgage Daily recently commented on a Harris Poll describing consumer attitudes towards mortgage products and mortgage advertising – including reverse mortgages. We took a close look at this poll and found some really interesting results showing consumer views on reverse mortgages that we thought deserved further comment here:

1. Awareness of reverse mortgages is remarkably high (more…)

There’s been a steady stream of commentary in recent weeks about the bright future of reverse mortgages. The arguments go like this: baby boomer demographics combined with factors like inadequate pensions/retirement savings and higher health care costs are converging to create a situation that will almost certainly require a growing number of senior homeowners to tap into their home equity. The first stages of this boom are already being seen, but huge market potential remains that has been largely untapped to this point. A few examples:

Americans age 62 or older hold an estimated $4.3 trillion of home equity according to the NRMLA/Hollister Reverse Mortgage Market Index (RMMI). Although the reverse mortgage industry has seen tremendous growth in the last five years, only a little more than 300,000 reverse mortgages have been originated in its short history, representing less than 1% market penetration.

NRMLA Press Release

“There’s roughly 23 million seniors in the United States. Estimates on the dollar value of their home equity range from as low as $3 trillion to as high as $5 trillion – so we’re looking at a lot of money that could be unleashed into the local economies to help seniors….Even with 35 (percent) to 40 percent growth over the next several years, there would still be less than 5 percent market penetration….And that’s before you get to the next wave of baby boomers that will be coming into the marketplace (as seniors).

Financial Freedom Chairman Jim Mahoney as quoted in Mortgage Banking Magazine (June 2007)

I expect to see a million loans…probably sometime next year … and then I continue to see that double over the next eight to ten years as the baby boomer’s continue to move into the 62 and older space…

Ken Austin, Reverse Mortgage Solutions, as quoted on Bank360.net podcast

If you buy into this argument (and it’s hard not to), a next logical question might be “What are some companies positioned to benefit from this trend? Are there publicly-traded reverse mortgage stocks that might present good investment opportunities?”

We’re certainly not investment experts or great stock pickers, but we though it would be interesting to take a stab at locating such companies. We started by scanning the member and service provider directories on the National Reverse Mortgage Lenders Association (NRMLA) website. But it quickly became clear discovering “gems” wouldn’t be easy.

First, the major players in the industry (Wells Fargo, IndyMac, Bank of America) are financial service giants. Reverse mortgages – at this point in time – are a small (though growing) niche part of their business. For example, IndyMac, (parent to Financial Freedom – the largest reverse mortgage lender), reports that in 2006 the Financial Freedom division accounted for about 19% of it’s total Mortgage Production net income.

Clearly, with sub prime mortgage woes and other considerations, trends in the reverse mortgage industry probably won’t be driving the stock prices of these financial giants anytime soon.

What about opportunities in smaller companies more focused solely on reverse mortgages? The smaller lenders and service providers we came across mostly appear to be privately-held companies having no publicly traded stock. If there are any public companies focused primarily on aspects of the reverse mortgage industry, we didn’t uncover them.

Bottomline: At this juncture, opportunities to capitalize on reverse mortgage industry growth via reverse mortgage stock plays appear slim. Still, it is worthwhile to monitor industry related stocks and, so, we’ve added a section to the sidebar where daily stock prices of industry-related publicly traded stocks we know about will be shown.

If you are aware of other companies that should be listed, drop us a note and we’ll add them. Include the ticker symbol, if you know it.

Reverse Mortgage Stocks

NASDAQ	2874.04	-19.72
S&P 500	1324.80	-5.86
Bank Of America C	7.11	-0.19
Cfc	0.00	+0.00
First American Co	15.83	-0.16
Fmar	0.00	+0.00
Fnm	0.00	+0.00
Genworth Financia	5.11	-0.39
Imb	0.00	+0.00
Oceanfirst Financ	14.69	+0.03
Wells Fargo & Com	31.97	-0.27

We came across a new study that looks at some of the behavioral reasons why people tend not to choose lifetime payment (annuity) options – despite the fact that, more often than not, this would be the “rational” thing to do. The study Behavioral Obstacles to the Annuity Market comes from the Pension Research Council at the University of Pennsylvania’s Wharton School.

It’s an academic paper (a difficult read – formulas and all), but we pulled from it some interesting points that may be useful in helping reverse mortgage borrowers better understand the framework within which they make their decisions:

• Mental Accounting – According to the study, the most important reason for annuities being unpopular is mental accounting. Mental accounting refers to the tendency to view financial decisions in isolation rather than within a broader framework of total wealth. People tend to view the lifetime payment decision as an isolated gamble (“will I live long enough to recoup my initial investment”) rather than as a component of a larger retirement funding picture. The study notes:
  

  “If annuity outcomes are segregated from their impact on total retirement spending, then purchasing an annuity appears to be a gamble which increases overall risk, rather than a form of insurance which can reduce risk. In order to combat this problem, annuity marketers and financial advisors need to better frame the annuity as longevity insurance. Having longevity insurance in the form of an annuity should reduce the need for precautionary saving and thus allow annuity holders to consume more in retirement.”

• Availability Heuristic – People are prone to assign greater weighting to “more easily imagined” factors in their assessment of probabilities.
  

  “In the case of annuities, the availability heuristic may play a role in overemphasizing the possibility of dying shortly after the annuity is purchased, because there are many ways an individual can imagine his imminent demise. The likelihood of greatly outliving one’s life expectancy may, on the other hand, not have as much salience, except in those cases where family members or other acquaintances have survived to very advanced ages. This exaggeration of the likelihood of early death would make annuities appear worse…”

• Fear of Illiquidity – People often feel the need to have quick access to cash to take care of emergency needs. With lifetime annuity plans, liquidity is sacrificed in exchange for regular lifetime payments. The study notes:
  

  “(S)imilar to the behavioral mistakes that individuals make when assessing probabilities of dying at early ages, it is quite possible that individuals also overstate the likelihood of catastrophic events that may require sudden spending that could not be met after annuitization.”

In November 2006,we reported on a Boston College study showing that HECM borrowers would best be served by choosing the “lifetime tenure” payment option – an option guaranteeing regular monthly payments to the borrower until loan termination (death, sale of home, etc.). Yet, only about 5% of HECM borrowers actually chose this payment stream. The new Pension Research Council study points to some of the reasons why and can give borrowers valuable insights into their decisions.

One of the key factors in assessing whether a HECM reverse mortgage makes financial sense is the length of time the borrower believes they will remain in the home. Remember, a reverse mortgage comes due in full upon death or moveout of the homeowner(s). Reverse mortgage advisors typically counsel potential borrowers that they should have strong expectations of staying in the home at least five years. (Many say seven years is a better threshhold.) Terminating early means you will have borrowed money at a very high cost for a short period of time.

But if borrowers start out with intentions of staying put for the long haul, data contained in a recent study from HUD shows that, for many, the reality winds up being quite different. The study’s focus is on developing data to help private investors understand the unique cashflows of HECM reverse mortgages in hopes of spurring development of an efficient secondary market for HECMs and other reverse mortgage products.

The data also serve as a reality check for senior homeowners contemplating a reverse mortgage. For example, as the table and graph below show, less than half (47.9%) of HECM loans for which observable history is available have “survived” past year six. Typical reasons for termination include death, moveout (voluntary sale, medical necessity, etc.), or refinancing. But whatever the case, a large share of HECM loans terminate in a relatively short period.

Couples, as would be expected, have longer loan tenures than either single female or single male borrowers. The study provides further details about loan terminations for borrowers who originate HECMs at different age levels. This topic will covered in a future post.

In interpreting this information keep in mind that the HECM program is not yet 20 years old and it has only been in the last 2-3 years that the popularity of HECM reverse mortgages has grown significantly. Better data will become available as these more recent loan originations mature.

If your thinking about a reverse mortgage, one key piece of information you’ll need is fairly good idea of what your home is worth. When it comes time to apply for the mortgage, of course, a formal appraisal will be conducted and used to determine the loan amount.

But prior to application, most borrowers want to get a good idea of the costs-benefits associated with a reverse mortgage. In the past, we’ve recommended www.zillow.com as a good place to get a free and immediate estimated value for your home. Zillow.com’s estimates are based on sales transactions for similar, nearby properties.

The Wall Sreeet Journal recently ran an article on the accuracy of the Zillow.com estimates. Essentially, they compared Zillow’s estimates for 1,000 properties with actual recent sales for those same properties prior to Zillow updating the new sales figures. Results?

A Wall Street Journal analysis of 1,000 recent home sales shows that Zillows “Zestimates” are often very good, frequently within a few percentage points of the actual price paid. But when Zillow is bad, it can be terrible – off the mark by more than 25% on one in 10 homes…Zillow came within 5% of the price in a third of the transactions studied by the Journal. It was more than 25% off target on 11% of them.

Ziilow is most accurate in the mid-price housing market, particulalry in areas where there are lots of comparable home sales. It is less accurate in high- and low-priced housing markets.

Lesson: Zillow is a great, easy to use tool but use it with care. Often, a perusal of of the Sunday real estate section will give you a good idea of how accurate Zillow’s estimates are.