The reverse mortgage market is evolving for the first time in a decade, as the industry pivots to address sagging sales and what it sees as a new opportunity presented by the number of baby boomers retiring.
Reverse mortgages are a type of loan that allows seniors to tap their home equity, as a lump sum or line of credit, without having to make out-of-pocket payments. The market has been dominated by a single product, a home equity conversion mortgage, which is insured by the federal government and sold by approved lenders.
However, sales have faltered following changes the federal government made in October 2017 that increased upfront borrowing costs and reduced borrowing limits. Sales of home equity conversion mortgages since October (the start of the government's fiscal year) are roughly 18,500 through April — on pace for a 42% decline from two years earlier, when the total number of mortgages was more than 55,000.
"If there's an additional $8,000 to $10,000 to close on the loan, that's sticker shock," said Jamie Hopkins, director of retirement research and vice president of private client services at Carson Group. "It's a large amount, it feels very expensive, and that's what we were hearing from loan officers: It's a big problem."
The reverse mortgage market has been dominated by HECMs for roughly the last decade, Mr. Hopkins said. While there are no exact figures, he estimates HECMs represented roughly 98% of all reverse mortgages — meaning there was little product competition.
Lenders have shifted within the last year, debuting alternatives to home equity conversion mortgages collectively dubbed "proprietary products."
Longbridge Financial is one such company offering a proprietary product, called Platinum, which it debuted in August. Prior to that launch there had only been one lender with a proprietary product, but there are now four such firms, said Christopher Mayer, chief executive of Longbridge. He estimates that proprietary loans represent about a quarter of all reverse mortgage sales today.
Such loans often have lower upfront costs when compared with home equity conversion mortgages, as well as higher borrowing limits that can extend into the millions of dollars, compared with the roughly $726,500 HECM limit, experts said. While proprietary loans aren't insured by the Federal Housing Association as are HECMs, they're also non-recourse loans, so borrowers can never owe more than the value of their house. That's important, said experts, because it means they're not necessarily riskier.
However, there are trade-offs. For example, proprietary loans with no origination costs are much less expensive upfront than HECMs but often carry higher interest rates over the life of the loan — perhaps 5.75% or more compared with rates as low as 4% or 4.25% for HECMs, Mr. Mayer said.
Lower upfront costs may work better for some seniors, for example those seeking to establish a line of credit that may be tapped in the future, advisers suggest. That's because it wouldn't cost several thousand dollars upfront for a line of credit the client may possibly never use.
Total sales of home equity conversion mortgages are down dramatically from their peak in 2009, when seniors bought nearly 115,000 mortgages. The government instituted a few rule changes prior to the latest round in 2017, aimed at making the market safer for consumers. Those changes, such as a required financial assessment of borrowers, decreased sales volume, Mr. Mayer said. Several big lenders like MetLife, Wells Fargo and Bank of America also have exited the market.
Steve Resch, financial adviser and vice president of retirement strategies at Finance of America Reverse, a mortgage lender, believes the proprietary market would have developed regardless of the recent drop in HECM sales, given the number of baby boomers becoming "age-eligible" to borrow. (Seniors must be over age 62 to buy a reverse mortgage.)
Plus, lenders are plugging product gaps that existed with HECM by being able to offer loans to more affluent seniors who wish to borrow $4 million, for example, said Mr. Resch, whose firm debuted two proprietary products last year.