A high number of retirees have equity in a home that could generate additional income, but few see the Home Equity Conversion Mortgage (HECM) as a viable option. In this opinion piece, Wharton emeritus finance professor Jack Guttentag, who runs a website called The Mortgage Professor, offers suggestions on how the HECM market could be substantially improved.
People reaching retirement age are living longer than ever, and retiring with less capacity to maintain their living standards. The Center for Retirement Research at Boston College estimates that more than half of the households entering retirement “may be unable to maintain their standard of living in retirement.”
Yet a sizeable segment of retirees have equity in a home that could generate additional funding through the use of a Home Equity Conversion Mortgage – the only variety of reverse mortgage insured by the federal government. The HECM program is well-designed and provides options for meeting a wide variety of retirees’ financial needs. Yet few seniors use it. At current rates, only about 60,000 HECMs will be written in 2015, which is a drop in the bucket compared to the need. To put this in perspective, about 3 million homeowners turn 65 every year.
The stunted growth of the HECM program mainly reflects market failure, as opposed to a considered preference by senior homeowners not to participate. For reasons explored in my working paper titled, “HECM Reverse Mortgages: Is Market Failure Fixable?,” the HECM market is the most dysfunctional and least competitive of all the major financial service markets. Lenders don’t display their prices anywhere, and borrowers don’t price shop. Most originators always charge the maximum origination fee allowed by law, regardless of how much they are making on the transaction. Markups are 2.5 to 3 times larger than in the standard mortgage market, though the work load involved in writing an HECM is much the same.
Some years ago, I decided to invest the money I had made in a moderately successful business venture in developing and maintaining a website to help consumers deal with home mortgages, later extended to reverse mortgages. My partners in this effort were Daryl Tubbs, Jack Pritchard and Allan Redstone. As I became aware of how and why the reverse mortgage market was so dysfunctional, I also realized that some of the tools my colleagues and I had developed to improve decision-making, if deployed more widely, could substantially improve the market. This article summarizes our game plan, which requires help from a number of quarters.
Establishing an Identity: Our approach to fixing the dysfunctional HECM market is to create an identifiable segment of the market that is functional, which over time will replace the segment that is not. For this to work, the new segment must have an easily recognizable identity that is associated with the features that distinguish it from the dysfunctional segment. Thus was born the “Kosher HECM,” with apologies to my Orthodox Jewish friends, for whom the term kosher means so much more.
read more: https://knowledge.wharton.upenn.edu/article/kosher-hecms-fixing-a-dysfunctional-reverse-mortgage-market/
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