When senior citizens see their retirement funds disappear in economic turmoil, the idea of tapping their home equity in a reverse mortgage suddenly takes on a lot more appeal. The Great Recession of 2008-2009 saw a significant spike in reverse mortgage originations. But for borrowers to access those funds, there has to actually be equity in the property. What, then, will happen this time around, as housing market values are tested not just by economic tremors, but by unemployment numbers not seen for nearly a century?
For the nation’s reverse mortgage lending community, those concerns seem to be of no concern.
“There hasn’t been enough understanding of where long-term values will be,” says David Peskin, president of Reverse Mortgage Funding.“Some will be bullish and some bearish. It depends on how long until we find some level of cure so we can go back to the way we functioned before the pandemic.”
The expansion of reverse mortgages during these times of economic crisis, he added, “provides an alternative to selling off your portfolio to provide alternative financing for everyday costs.”
Shelley Giordano, author of “What’s the Deal with Reverse Mortgages,” noted that government regulations have helped those that are retiring, the most recent example being the CARES Act, which was signed into law on March 27, which imposes some limits on lenders calling a reverse mortgage into default for unpaid taxes and insurance.
VALUES RISING SLOWLY
Surprisingly, during the coronavirus, home values have, at least initially, been rising at the lowest level in seven years, according to Realtor.com, which saw new listings up by 5% in March and 1% in April.
“Although prices are still rising compared to last year,slower gains are indicative of early market response to economic uncertainty and hurdles to completing a transaction,” said Danielle Hale, chief economist at Realtor.com.
Giordano added, “Home values have not really dropped.Seniors have more than $7 trillion in home equity and interest rates are low.So, it’s a good time for reverse mortgages.”
It might make particular sense for interested borrowers to close on a transaction as soon as possible. That’s because under the unique rules of reverse mortgages, borrowers can access the full amount of equity covered by the loan at closing, even if the value of the home later drops. “In regular mortgages, banks can alter their loans and [some] just did that,”Giordano pointed out. “But with reverse mortgages, the money they borrow can’t be canceled, frozen or reduced even if the value of the home drops.
“Congress recognized for the first time that forcing people to take distribution from their portfolio is a burden,” said Giordano. “You don’t have to sell at a loss in 2020.”
Giordano, who is also founder and former chair of the Academy for Home Equity in Financial Planning, said, “If you think about a dip in portfolio value as a potential spending shock, it does not take long to seethe Home Equity Conversion Mortgage standby line of credit as a solution. Just about anybody can appreciate that you don’t want to sell your Bank of America stocks for a couple of dollars, when you paid $30 for them.”
“But this is exactly what happened to some retirees during the financial crisis, which depleted their portfolios prematurely. To survive and thrive in retirement in the coming years requires new thinking and a clear understanding of the options open to retirees. One of these options is HECM, or what most people know as reverse mortgages, that provide the opportunity to raise funds from their home equity while continuing to enjoy living in their homes.”
Steve Irwin, president of the National Reverse Mortgage Lenders Association, chimed in that “a lot of retirees who have retirement funds tied up in stock market solutions and 401ks are moving to reverse mortgages…[they’re a] tool being used to smooth out the shock of the event.”
Irwin said, “We’ve seen an increase in the number of potential applicants seeking mandatory counseling, which is an early indicator of an uptick in demand for reverse mortgages.”
SUPPLY AND DEMAND
Looking at home values, he said, “The simple rules of supply and demand will come into play. There are thousands of individual markets across the nation and we can’t say what will happen to home values, but we will see an impact in property values in every market. The current economic crisis relating to the COVID-19 pandemic provides another opportunity for senior homeowners to see how their home equity can be best utilized as part of their financial plan.”
“At this time,” he added, “we haven’t seen a wide impact to property values, it’s too early to say whether COVID-19 will play a role but if home values go down it doesn’t impact their ability to get reverse mortgages and use them.
The CARES Act follows the Housing and Economic Recovery Act of 2008 that was created to address the subprime mortgage crisis, which also assists reverse mortgage holders. The act raises the allowable limits of reverse mortgages to $417,000, up from about $362,000. “It makes it easier and less expensive for seniors to access the cash value of their homes on a tax-free basis and expands the amount that can be borrowed,” said Terry Savage,author of “The Savage Truth on Money” and other books on personal finance.
“Now there will be a higher borrowing level on Federal Housing Administration reverse mortgages and fees will be capped at 2% of the first $200,000 borrowed and 1% on the balance, with an absolute maximum of$6,000 in fees.
REAL PRICES STRONG
“Real estate prices are holding up, with potential buyers unable to see many listings due to the lockdown,” said Ralph Rosynek, senior vice president at Moneyhouse, which makes reverse mortgage loans.
“We expect to see increases in reverse mortgage applications in the coming months as seniors seek to create rainy day funds to shore up financial stability,” Rosynek said.
When asked to assess the increase in reverse mortgage signups, Rosynek said, “It’s too early to provide exact figures. The whole world changed in early March and we’re only [a few weeks] in.”
Reverse Mortgage Funding’s Peskin said reverse mortgage applications have grown during the coronavirus. “We’re up 47% for March and 35%for April,” he said. “It’s pretty substantial.” He sees home prices deteriorating during the pandemic but hopes it’s temporary. “It depends how long this goes on that we’ll be in a stalemate. But the government is covering people through high unemployment, which protects cash flow to a certain extent.”