As home prices rose throughout 2013, many Americans saw significant returns on their original investments in the form of accrued equity. Rapid rates of appreciation, particularly in major metro areas along the East and West coasts, led to improving trends toward home retention and brought many homeowners back above the water line on their mortgages for the first time since before the recession.
All that built-up equity has opened the door to opportunity, both for the property owners and the mortgage servicers whose business may have stagnated during the housing finance market's extended lull. But as panelists at the recent Residential Mortgage Servicing Rights conference in New York discussed, capitalizing on those opportunities may be contingent upon tailoring reverse mortgage products to reflect a changing environment where risk assessment and the ability to repay rule.
The role of reverse mortgages in retirement
Speakers at the inaugural conference, put on by the Information Management Network March 10 and 11 at the downtown Marriott in New York, generally agreed that while the reverse mortgage market is ripe for growth, the execution needs to be refined. Senior homeowners represent a significant segment of the American population, one that's only expected to balloon as people live longer, and as wages stagnate and public and private programs remain underfunded, their retirement savings may become dependent on financing by way of tapping into their equity. But in helping them achieve their retirement goals, mortgage servicers must work on streamlining and improving their product offerings.
Panelists at the conference were considered off the record, but a HousingWire report detailed the data supporting their reverse mortgage market prognosis. Currently there are more than 41 million Americans age 65 or older, a group with a median income of $33,118 and a median net worth of $170,128. More than 80 percent of that segment owns homes, with their total combined home value an estimated $4.54 trillion through 2013 - $1.08 trillion of which was debt and $3.46 trillion of which was home equity. Furthermore, seniors are expected to total 92 million by 2060 - a full 20 percent of the country's population - meaning the need for alternative retirement-funding plans will only grow as members of Generation X and Generation Y make their way toward older age.
"Americans just don't have enough to retire," one panelist said. "It's a product that needs to exist. If there isn't a market for this, it's going to be on taxpayers. This is a market that's going to exist. If you have 2-3 percent market penetration today, so you could have 20-30 percent over time. $3.5 trillion of the $9 trillion in home equity is controlled by seniors."
For 2014, forward mortgages total a combined value of $1.1 trillion, while reverse mortgages account for $13.9 billion. Those figures are expected to grow to $1.23 trillion and $16.4 billion, respectively, in 2015, further illustrating the gap the void in the marketplace many servicers are in a position to fill.
"It makes sense that this product should work," another panelist said. "But it needs calibration to make it more sustainable. The way the product is being originated is evolving. People are going to have to take a view that allows responsible practices. There aren't a lot of servicers in this space. Bank and nonbank lenders should feel there's a fair level of return for the risk."
Maintaining proper perspective
Still, while the opportunities to capitalize are plainly present, another panelist warned that banks and lenders should not do so at the cost of abandoning the risk assessment and loss mitigation strategies that supported the housing market's gradual recovery in the first place. Standards for approval have been adjusted since the recession, mostly for the better, and the recent Qualified Mortgage and Ability-to-Repay rules implemented by the U.S. Consumer Financial Protection Bureau reinforce that shift. Simply because the opportunities exist, in other words, doesn't mean lenders should forget how to say 'no.'
"Not everyone should have this product," the speaker said. "Growth of the market has to do as much with responsible management both from origination and servicing standpoints as with anything. If you can't afford to cut your lawn, pay your utilities - this is not a product you can afford. But done right over the next two decades it can make it better for seniors retiring."
Home equity lines of credit and other reverse mortgage products will potentially support the long-term goals of many Americans over the next 10 to 20 years. But how those products are constructed, marketed and handled remains vital to both the ongoing recovery of the housing finance market and the long-term health of an economy that is currently still underfunded and uncertain.