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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 firstname.lastname@example.org 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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