Why Aren't Reverse Mortgages More Popular?

Reverse mortgages represent a way for seniors to tap the equity in their homes, typically without having mortgage payments due each month!

The loan is repaid to the lender when the borrower dies, sells the property or leaves the home permanently. The bank cannot seize the home and the borrower is not giving away title to the home. Prior to being approved for the loan, the borrower(s) must go through counseling to make sure that they understand the program.

The reverse mortgage loan is also not the right vehicle for everyone, and these loans will typically have higher fees than a traditional mortgage loan.

But, for the elderly homeowners for whom a reverse mortgage would be appropriate, why aren't they more popular?

The following excerpt from an article published at Advisor Perspectives seeks to explain the situation, with a link provided to the entirety of the story...

'What is Holding Back Use of Reverse Mortgages?' by Dorothy Hinchcliff

Reverse mortgages seem like a great idea for hordes of baby boomers who don’t have enough income to maintain their lifestyles, or – worse – to buy basic necessities when they retire. Although some advisors and academics have demonstrated how reverse mortgages are good wealth management tools for certain clients, a new working paper from the World Bank examines why they haven’t worked to solve inadequate retirement savings and longevity risk.

The paper, “Reverse Mortgages, Financial Inclusion and Economic Development: Potential Benefits and Risks,” noted serious challenges facing pension systems and the risk of old-age poverty; the drivers of those risks include aging societies, low interest rates, low retirement plan contribution rates, generous retirement ages and early withdrawal rules. Many studies suggest reverse mortgages could be a good tool to supplement pension income or act as insurance against financial shocks, such as health expenses, the paper observes. In particular, reverse mortgages could be especially beneficial for very elderly women, who live longer and have lower income than most men, and “house rich, cash poor” households. But a shortage of supply from issuers and lack of consumer demand have resulted in reverse mortgages, for most people, still being products of last resort rather than used for prudent retirement planning. The paper, which examines many other studies and was written by Peter Knaak, Margaret Miller and Fiona Stewart of the World Bank, also outlines what would need to happen for this to change.

In fact, banks in both rich and developing countries have exited the reverse mortgage market in recent years, despite the fact that only a small group of them entered the business in the first place, the paper adds. The products are relatively complex and are difficult to understand. Their reputation has been tainted by cases of fraud and sales to inappropriate customers. And they create other key concerns for borrowers: How will the reverse mortgage income affect eligibility for other need-based benefits? If I move out of my house and into a nursing home, what happens? Why are the fees on reverse mortgages so high?

Read the rest of the article at Advisor Perspectives here.

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