Federal Reserve report suggest demand for reverse mortgages from younger borrowers

BY STAFF WRITER
A recent report from the Federal Reserve Board is one of the first detailed analyses of how eligible consumers are using reverse mortgages at this stage in their development.

The report, Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market, is the first paper to perform this analysis using actual loan-level reverse mortgage data and covers data from 1989 to 2007.

The report finds that borrowers who take a line of credit, single male borrowers, and borrowers with higher home values are more likely to exit/payoff reverse mortgages sooner than the rest of the population. As reverse mortgages have gained exposure in the market place, the author notes that today’s reverse mortgage borrowers are younger than they were the early years of the program and suggests that seniors under 62 may be interested in reverse mortgages if they were available.

The report goes on to associate the rapid growth in reverse mortgages during 2000-2005 with an overall price boom in housing, as more eligible buyers saw an opportunity to draw extra cash out of the homes they may have purchased many years ago at much lower prices. This suggests that the growth rate in reverse mortgage originations may slow a bit until housing prices recover from their slump.

One of the most common complaints about reverse mortgages are the upfront fees involved and how many believe that these loans are a bad deal for elderly homeowners. The report explains that the upfront costs are necessary “because there is little risk-pooling in the HECM program, insurance premiums have to be high for HUD to break even.”

(Posted September 3, 2009)