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Reverse Mortgages

VIEWS: 64 PAGES: 3

									                                                                                             FRM 3-3
                                                                                               3/2010

                                            ABSTRACT

       The Relationship Between Housing Values and Demand for Reverse
                                 Mortgages
Prepared by: Eileen St. Pierre, Personal Finance Specialist
             Oklahoma Cooperative Extension Service
             233 HES, Oklahoma State University
             Stillwater, OK 74078
             (405) 744-8072
             eileen.stpierre@okstate.edu

St. Pierre, E. (2009). The Relationship Between Housing Values and Demand for Reverse Mortgages.
Journal of Consumer Education, 30, 30-44.

Implications for Cooperative Extension:                their lack of personal savings, as compared to
While the rate of increase has slowed in the past      previous generations. One financial instrument
two years, the demand for reverse mortgages has        increasingly being considered is the reverse
continued to increase nationwide despite the           mortgage. A reverse mortgage is a special type
recent drop in home values. The number of              of home loan that allows a homeowner to
individual lenders has also increased. This            convert a portion of his or her home equity into
increase in competition may have left                  cash. The value of the home is, therefore, an
homeowners confused about which company to             important determinant of the cash flow received
trust. Seniors appear to be taking out reverse         by the homeowner from a reverse mortgage.
mortgages earlier in their retirement years,
indicating that they may be relying on reverse         This study examines how the surge in home
mortgage as a more predictable income source,          values between 2000 and 2006, and the dramatic
not just as a last resort that enables them to         drop in prices since then, are related to the
remain independent. Given the recent declines in       demand for reverse mortgage loans in the United
the value of seniors’ retirement portfolios,           States. It also investigates the relationship
consumer interest in reverse mortgages will            between recent trends in reverse mortgages and
remain high. It is imperative that seniors and         borrower characteristics such as age, gender, and
those individuals who are nearing retirement           state/region of residence of the eligible
fully understand reverse mortgages. Those in           homeowner(s). The results of this study provide
Cooperative Extension need to make sure they           insight into how consumer educators, the
counter ads from reverse mortgage lenders with         Federal Government, the mortgage industry, and
a sound curriculum that provides unbiased and          financial planners can better educate the older
accurate information about the benefits and risks      adult population about this type of financing.
of reverse mortgages.                                  The results also provide insight into how the
                                                       older adult population may be viewing this type
Overview                                               of financing.

With the aging of the baby boom generation,            Data
much attention has been focused in the
consumer education community on how this               The data used in this study have been made
generation will finance their retirement given         publicly available by HUD (http://www.
hud.gov). It is partitioned into three sub periods.   in California. There were similar drops in
Period 1 covers January 1, 1990 to January 31,        market shares for the other states as well.
2000, which marks the beginning of reverse
mortgages up until the housing bubble. Period 2       The author then estimated a linear regression in
covers the 2000 to 2006 housing bubble, which         order to identify the factors affecting the amount
goes from February 1, 2000 to May 31, 2006.           of money homeowners received from a reverse
Finally, Period 3 looks at the recent housing         mortgages. The key findings were:
crisis and resulting credit crunch, which spans            It did not matter where the homeowner
June 1, 2006 to April 30, 2009 (end of the                    lived. There was no state or region that
sample period).                                               had a stronger, more significant impact
                                                              on the amount of a reverse mortgage
Trends in the Reverse Mortgage Industry                       loan than any other.
                                                           During the housing bubble, as home
The author compiled summary statistics for the                prices rose, homeowners received more
top ten states in the number of reverse                       money from a reverse mortgage.
mortgages. California dominated the list in all            After the housing bubble burst, as home
three periods. Florida grew consistently over the             prices fell, the amount of a reverse
three periods with respect to the number of                   mortgage loan increased. This result
reverse mortgages written. Arizona began                      lends support to the argument that older
appearing on the list in Period 3, placing fifth              adult homeowners, feeling financially
with over 12,000 reverse mortgages being                      pinched by the economic recession, still
issued. These findings should not be surprising               needed to take out reverse mortgages to
since California, Florida, and Arizona                        make ends meet.
experienced some of the greatest increases in              As the number of lenders increased,
housing values in Period 2, but also suffered                 more money was available for reverse
some of the largest declines in Period 3.                     mortgage loans, so homeowners who
Between June 2006 and April 2009, demand for                  wanted to use reverse mortgages to
reverse mortgages was still strong in these hard-             refinance an existing mortgage were
hit states, despite the fact that homeowners may              now able to borrow more money.
have been unable to access as much money due
to declining home values. For all of the top ten      Borrower Characteristics
states, the number of reverse mortgages
increased over the sample period.                     The author estimated another linear regression to
                                                      determine if certain borrower characteristics
Another interesting statistic is the number of        have changed over time. The average age of
lenders in each of the top ten states. In the         reverse mortgage borrowers and the percentage
beginning of the study, the number of lenders         of single female borrowers have significantly
was small, ranging from 13 (Colorado) to 65           declined over the past 20 years. The percentage
(California). During the housing bubble, the          of multiple borrowers (married couples) has
number of lenders in all of the top ten states        significantly increased over the past 20 years.
increased. In less than three years following the     These results suggest that couples may be
burst of the housing bubble, the number of            making this borrowing decision together earlier
lenders exploded for all states, but the numbers      in retirement and not leaving it as a last resort
were particularly alarming for Florida and            for the surviving spouse.
California where the number of reverse                Conclusion
mortgage lenders increased over 550% and
200%, respectively. In Period 3, there were over      While the total number of reverse mortgage
800 different lenders in these two states alone.      loans has been increasing over time, the rate of
However, the market share of the top 5 lenders        increase has slowed considerably in the last two
in Florida dropped between Periods 2 and 3            years. This suggests that homeowners are now
from 60.4% to 29.1% and from 61.9% to 39.2%
weighing the decision to take out a reverse
mortgage more carefully and considering all
their options for financing their retirement cash
flow needs. This presents consumer educators
with the opportunity to educate older adult
homeowners about the benefits and risks of
reverse mortgages, as well as other alternatives.

								
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