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, or no longer occupies the home as
the primary residence. The proceeds of the reverse mortgage depend upon the
age of the youngest borrower, the current interest rate, lower of the
appraised value or purchase price of the home, and the maximum mortgage
limit. 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
in 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 recent recession and resultant drop in home values,
the HECM growth slowed to an average annual rate of 16% from 2008 to 2013.
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 $2.2 trillion from the third quarter
of 2012 to the third quarter of 2013, and is expected to have a similar
growth in 2014.
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.
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Housing Price Index vs. HECM
Loan Volume
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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
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Senior Population Growth
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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.
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Equity Growth
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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. During just the past twelve months, equity
dollar amount has seen an increase of $117 billion. 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 So EZ Mortgage and its 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 us today at 855-955-SOEZ to learn more about reverse
mortgages and get Reverse Mortgage ready!
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August 11, 2014
What The HECM?
