As the baby boomers become the next wave of senior citizens, it is easy to assume that they would be interested in pursuing reverse mortgages, a loan product specifically designed for those who are 62 or older. But that has not quite happened.
Reverse mortgages enable a borrower to access their home equity and defer the payment on the loan until they sell or move out of the residence. In the event of the borrower’s death, the heirs are responsible for repaying the loan. A homeowner can receive money for the reverse mortgage loan either in a lump-sum payment, monthly payments or as a line of credit. A homeowner is still responsible for property tax payments and insurance, as well as home maintenance and other residential obligations.
The most prominent type of reverse mortgage is the Home Equity Conversion Mortgage, or HECM, which is insured by the Federal Housing Administration. Some state housing finance agencies offer their own proprietary programs, such as the Reverse Annuity Mortgage Program offered by the Connecticut Housing Finance Agency (CHFA) in partnership with the Connecticut Department of Social Services.
The Connecticut program “provides monthly cash payments that can be used to cover a variety of services connected with long-term care needs that allow the homeowner or joint owner to remain in the home,” said Lisa C. Kidder, the housing finance agency’s director of communications. Applicants must be 70 or older and are prescreened by the Connecticut Department of Aging to be sure they meet the criteria.
“There are no outside lenders involved,” Kidder said. “A representative of an independent social services agency assesses the applicant’s long-term care needs. It’s important to note that this program serves a very specific need, and in the last five years, CHFA has closed eight loans.”
A LACK OF INTEREST?
Reverse mortgages have weathered some controversy over the years, ranging from news stories regarding foreclosure cases against seniors who defaulted on the terms of their loans to a wider misperception that lenders automatically seize the property upon the death of the borrower.
The Consumer Financial Protection Bureau, a federal regulatory agency, received 206 complaints related to reverse mortgages in 2012. By 2016, the agency received 562 complaints, a 172 percent increase over a four-year period. In June 2015, the agency issued a consumer advisory titled “Don’t Be Misled by Reverse Mortgage Advertising.” Without naming specific lenders, the agency faulted advertising and marketing materials from reverse-mortgage providers that gave the impression that the product was a win-win solution for seniors.
“Many ads, however, didn’t mention that seniors could lose their homes if they don’t satisfy the loan requirements, such as paying property taxes or homeowners insurance,” the agency warned.
“Seniors said the ads made reverse mortgages look like a good way to travel and enjoy retirement while they were still young and active. Yet Americans are living longer, more active lives than ever before. Reverse mortgage borrowers can outlive their loan funds by borrowing without careful planning.”
In December 2016, the agency enacted civil penalties against three reverse mortgage companies — American Advisors Group, Reverse Mortgage Solutions and Aegean Financial — for deceptive advertising.
The problems associated with reverse mortgage can be mirrored in the fairly low origination volume for the product. The number of Home Equity Conversion Mortgages originated in the U.S. have been in a decline since their fiscal year 2009 peak of 114,692. For fiscal year 2017, as of April, only 31,864 were originated.
A lack of interest has kept the product out of the offering lineup at The Westchester Bank in White Plains. “This is not something that is popular with our client base,” said John M. Tolomer, president and CEO, whose bank is also absent from the traditional residential mortgage market. “We don’t have any plans to offer this in the foreseeable future.”
Many older Americans are not convinced that the product is safe. In May 2016, the American College of Financial Services released the results of a reverse mortgage survey of 1,000 people between the ages of 55 and 75 with at least $100,000 in investable assets and $100,000 in home equity. Only 14 percent of respondents said they considered pursuing this loan, while just one respondent reported to having a reverse mortgage. When asked how the reverse mortgage worked, less than one-third of respondents could correctly answer the question.
Rick Kalnins, reverse mortgage specialist at Middletown, Connecticut — based Liberty Bank, acknowledged that the product’s image could benefit from better marketing. “We need to dispel that this is not a loan of last resort and that it can provide a viable financial solution,” he said.
A MATTER OF TIME
From a lender’s perspective, reverse mortgages require much more planning ahead than the traditional home loan. Extensive financial counseling on the pros and cons of the loan are required for the borrower and, when applicable, that person’s family. On some occasions, the borrower’s financial planner and attorney are also involved.
“It takes a very, very long time period to get it done — about eight to 10 months,” said Brent Nyitray, director of capital markets for Stamford-based iServe Residential Lending, which does not offer this type of loan. “Most loan originators prefer not to do a reverse mortgage if they had the choice between that and a normal mortgage.”
Still, there are financial institutions that gladly provide this product. Brian L. Mahone, vice president and regional manager at Washington Trust Mortgage Co. — which is represented locally with a Darien office — said the reverse mortgage is “not a program for everyone,” although he said there were a number of inquiries being made on behalf of potential borrowers.
“Most of my referrals come through attorneys for the people and from family members,” he said, adding that some older customers ask about the product with the branch tellers. “Our tellers are a little more intimate with our borrowers.”
Mahone said that one key selling point for the product involves the older homeowner’s ability to remain in their residence. “If you tell someone that they have to sell their home and move into a two-bedroom apartment, that is not going to appeal to a lot of people,” he said.
John Luddy, vice president of reverse lending at Avon-based Norcom Mortgage, agreed. “When you have a reverse mortgage, you always own your home,” he said. “Many adult children used the reverse mortgage so their parent can stay at home and not go into a nursing facility. If you go into a convalescent home, your money is gone within a year.”
Luddy also stated that his Fairfield County customers use their reverse mortgages to help keep on top of property taxes. “I have clients in Fairfield County whose property taxes equal the amount that they paid for their homes in the 1960s,” he said. His company will soon be expanding across the border into New York to take advantage of a potentially “booming” reverse mortgage market, he said.