A reverse mortgage, the most popular form being the “Home Equity Conversion Mortgage” (HECM), is a mortgage that allows seniors (aged 62 years and above) to access and borrow against the equity in their home without having to sell it, give up the title, or incur a monthly mortgage payment. While such funds can be used for any purpose, repayment is required only if the borrower dies, sells the home, no longer occupies the home as the primary residence or fails to maintain the property and/or pay property taxes and hazard insurance. The proceeds of the reverse mortgage depend upon the age of the youngest borrower or eligible non-borrowing spouse, the current interest rate, and the lower of the appraised value, the FHA mortgage limit, and the sales price (for HECM Purchase loan). While the traditional HECM program offered financing on existing primary residence, Congress has, over the recent years, expanded the program to allow for the purchase of a home.
Reverse mortgages have become increasingly popular with seniors who have equity in their homes and are seeking to supplement their income. During the first four years of the program, HECM originations increased exponentially exhibiting an average year-on-year growth of 167% and resulting in an increase in HECM originations from just 389 in 1991 to 6,737 by 1994. In the thirteen years that followed, up until the recession of 2008, HECM originations increased at an average annual rate of 33%, reaching 346,177 loans in December of 2007. This rapid growth can be attributed to the increase in elderly population of 5%, and a home price driven equity increase of nearly 45%. Due to the recession and resultant drop in home values, the HECM growth slowed to an average annual rate of 12% from 2008 to 2016.
Since the inception of the reverse mortgage program, HECM origination volume and the Housing Price Index (HPI) have shown a strong positive correlation (Figure 1). As home values appreciate, the demand for HECM loans increases and vice versa. The Federal Reserve reported that new equity in household real estate rose by about $1.35 trillion from the first quarter of 2016 to the first quarter of 2017.
Equity growth and increasing home values provide a strong positive evidence for future increases in HECM loan volume. The numbers are also encouraging for the average U.S. homeowner, especially for those who are eligible and considering a reverse mortgage.http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/hecm/hecmmenu
With the upward trend on the tail of HPI, a similar upward momentum in HECM volume in the future is expected
In addition to the exponential growth in home values (HPI), another factor that adds impetus to the future demand of HECMs is an increasing elderly population. The US Census Bureau projects the number of people with age 65 years and above to grow by another 10% by 2050 (Figure 2). Growth in the elderly population can primarily be attributed to the Baby Boomer generation born between 1946 and 1964, during which there were 79 million births in the U.S. Over the next 12 years, the Baby Boomers will continue to add to the HECM eligible population and provide further support to the reverse mortgage market.https://www.census.gov/prod/1/pop/p23-190/p23-190.pdf
A steady increase in size of the 65 years and above population in terms of both in numbers and percentage of population is forecasted up to 2050 by the U.S. Administration on Aging.
Besides increasing home prices and a growing elderly population, there is another driving force of home equity growth: reduction in debt. As a borrower makes the monthly principal payments on his/her standard forward mortgage, home equity grows while the mortgage debt reduces. To take an example, a 50-year-old homeowner with a 30-year-fixed mortgage will be HECM eligible in 12 years and will add at least 25% equity (Figure 3) until the age of 62 through regular principal payments toward the mortgage even if the home prices remain stagnant.
Equity growth accelerates as the borrower repays the principal loan balance.
According to the data released by National Reverse Mortgage Lenders Association (NRMLA), seniors have more equity in their homes today than at any time since mid-2008. As of March 31, 2017, dollar amount of home equity has seen an increase of $530 billion during the past twelve months. With appraised value of the property being a key factor to the amount of HECM proceeds, the recent signs of improvement in the housing market have been encouraging for seniors and will allow them to access more of the equity in their home. Over the next five years, with the projected increase in home values, equity, and the percentage of elderly population, HECM demand is also expected to show a robust growth. The expanding niche for reverse mortgages presents an excellent opportunity for Sun West partners to capture this market share and establish a strong, long-term presence in the reverse mortgage market by providing senior citizens with the increased flexibility they need in planning for their retirement and financial security. Contact your Account Executive today at 855-OK-SUNWEST to learn more about reverse mortgages and get Reverse Mortgage ready!