It is difficult to capture in a sentence the impact the COVID-19 pandemic is having on our health, our families, our fears, the operations of businesses of all sizes, the world’s governments, and our future. Not one segment of people or group of businesses has reported the pandemic is not affecting them.
It therefore should not come as a surprise that the reverse mortgage industry is feeling the effects of the pandemic. What may be surprising is that, while the pandemic is having the expected negative effect on the reverse mortgage industry, it also is having at least one positive effect that may translate into some much-needed relief to borrowers both during and after the pandemic.
Broadly stated, a reverse mortgage allows a borrower to obtain a loan based on the amount of equity the borrower has in his or her real property. Depending on the type of reverse mortgage the borrower obtains, the loan proceeds are paid out in either a lump sum or pursuant to a payment plan. Thereafter, the borrower does not make loan payments. Real property taxes and homeowners insurance premiums must be paid. Depending on the reverse mortgage the borrower obtains, he or she may be required to make those payments throughout the life of the mortgage. Aside from possibly making those payments, the borrower continues to live in the property for the remainder of his or her life without having to repay the loan. After the borrower (or the last borrower if there are more than one) dies, the lender forecloses on the property and sells it to regain the proceeds of the loan. Reverse mortgages have their critics, but they also have their champions. Many argue reverse mortgages allow seniors and retired persons to use the equity in their properties at a time in their lives when they either have no income or are on a fixed income.
While the COVID-19 pandemic shreds the stock market, individuals are watching their retirement savings take massive hits and drop in value, sometimes as much as 20 or 30 percent. However, the majority of homeowners have experienced a growth in their housing wealth over the past years.
Several reverse mortgage lenders have reported the drop in value of people’s retirement savings has left seniors and retired persons looking for ways to supplement their income. They are now considering reverse mortgages in greater numbers. In fact, one New York-based reverse mortgage lender reported the industry is seeing a 67 percent increase in applications from last year.
When a potential new borrower inquires about reverse mortgages, lenders report they come to the table already more informed than in the past. The industry has long been plagued with confusion and misunderstanding about reverse mortgages and their features. Today’s potential borrower already has done research in advance of speaking with a lender and has compared different aspects of the various reverse mortgages being offered. New potential borrowers are more informed at least about the fundamentals of the loans and more ready to talk about the nuances between the different loan products.
Not only are more informed potential borrowers contacting lenders, but lenders report they also are seeing more financial advisors contacting them to learn about reverse mortgages. These advisors are seeking alternatives they can offer their clients instead of suggesting their clients seek to sell their properties.
While more borrowers and advisors for the first time may be considering reverse mortgages, the COVID-19 pandemic may leave them with fewer lenders and loans options. Similar to traditional mortgages, there are two options for reverse mortgages: a federally backed reverse mortgage and a private investor-backed reverse mortgage. The United States Federal Housing Administration oversees a program for reverse mortgages. Its Home Equity Conversion Mortgage ("HECM") program provides insurance for reverse mortgages that meet certain criteria. Mortgages that are not governed by the HECM program, the so-called proprietary reverse mortgages, are not subject to those criteria. However, they do not enjoy the stability that backing from the federal government brings. Also, some lenders are reporting the costs of these mortgages to the investors, and the amount of return the investors can expect to receive are trending lower during the pandemic.
Despite this fact, in a recent survey conducted by the trade publication Reverse Mortgage Daily, 40 percent of responding lenders reported that proprietary loans were less than 10 percent of their total loan volume. Approximately 17 percent reported these loans accounted for 10 to 20 percent of their loan volume. In other words, a majority of the responding lenders reported that proprietary loans make up a mere one-fifth or less of their loan volume.
Despite the fact proprietary loans are a small fraction of the reverse mortgages these lenders have, they indicated that exploring a way to increase the amount of proprietary loans they provide will be a focus for the near future. Nearly half responded they believe proprietary loans will be “very important” to the future growth of the reverse mortgage loan industry.
However, not all signs point to an increase in proprietary loans during the near future. At least two lenders have advised they temporarily have suspended offering any type of reverse mortgage loans. Both lenders point to the same cause: market instability resulting from the pandemic. They have disclosed that market instability as a whole and pricing instability, especially with regard to the non-HECM proprietary loans, have led them to cease offering any new loans. They vary in their approach to which in-process loans will be completed. However, they uniformly point to the pandemic as the cause and ensure the public that the move to cease new loans is temporary. Meanwhile, one of the industries ubiquitous lenders - Quicken Loans - has announced it, too, will pause originating new reverse mortgages through its division One Reverse Mortgage while the company focuses on its Rocket Mortgage brand.
At bottom, the COVID-19 pandemic is upsetting the reverse mortgage industry in unique ways. While it may be directing more and better informed borrowers and financial advisors to consider these loans, at the same time it is causing some lenders to leave the space at least temporarily. It remains to be seen how this will play out in the coming months and after the industry adjusts to the new normal resulting from the pandemic.