Reverse mortgages can help current and future retirees cover shortfalls in their retirement savings. As employer sponsored retirement benefits shrink or disappear, older homeowners have turned to their home equity to cover the gap between retirement savings and the amount they need for retirement. The number of retirees is growing, and so is the popularity of reverse mortgage loans.
In 2013, reverse mortgage loans increased by 20 percent over 2012 to $15.3 billion. Reverse mortgages reached their highest volume in 2009 at $31.2 billion, but some mortgage lenders stopped offering them due to concerns about changes in home values and high default rates on revere mortgages. Mortgage lenders have regained confidence in reverse mortgages today, as retired and retiring baby boomers increase demand for reverse mortgages. The selection for borrowers has increased since 2012, and continues to do so.
Reverse Mortgages: Are They the New "Retirement Plan"?
As 77.3 million baby boomers retire, many can expect a shortfall between their retirement savings, social security and funds needed for retirement. Reasons for this trend include:
A shift from employer-provided pension plans to employee retirement savings plans including IRAs and 401(k) plans began about 25 years ago. Baby boomers are the first generation to assume responsibility for most of their retirement investments.
Forbes reports that the Internet and housing bubbles caused setbacks in baby boomers' retirement plans and nest eggs.
The Social Security program has not been adjusted to account for a 16-year increase in average life expectancy since its inception. More retirees are drawing social security longer than the program was designed to support. U.S. News reports that only 52 percent of U.S. retirees receive income from their own assets.
Reverse Mortgages Risky for Mortgage Lenders, FHA
Reverse mortgages allow borrowers to draw cash against home equity in a lump sum, a credit line, scheduled payments or a combination of these options. When home values drop, reverse mortgage lenders and FHA experience losses in situations where homeowners tap their home equity in lump sums or walk away from homes worth less than the amounts owed on reverse mortgages.
U.S. taxpayers funded a $1.7 billion bailout of the Federal Housing Administration (FHA) last year; the agency insures mortgage lenders against losses on most reverse mortgage loans. The FHA mortgage insurance programs are typically self-funded with mortgage insurance premiums paid by borrowers of FHA insured mortgages, but FHA risked falling below its mandatory capital reserves due to high mortgage delinquencies and foreclosures during the recession.
Potential Boom for Mortgage Lenders as Retirement Ranks Grow
Growing numbers of retirees could help overcome lender concerns about reverse mortgages as a burgeoning business opportunity emerges. If reverse mortgages get a post-recession do-over, caution will likely prevail. FHA has lowered the maximum lump sum withdrawal to 60 percent of available funds during the first year of an FHA insured reverse mortgage and increased mortgage insurance premiums for reverse mortgages insured under its Home Equity Conversion Mortgage (HECM) program.