By Jason Oliva
With a low penetration rate of eligible retirees who could potentially benefit from using a Home Equity Conversion Mortgage (HECM), today’s reverse mortgage market presents a vast runway to grow product utilization among this widely underserved population, according to a recent study from the Massachusetts Institute of Technology (MIT).
The main goal of the 92-page MIT study is to estimate what percent of retired households with sufficient home equity and significant, but not too large, financial asset holdings can best use a reverse mortgage.
Researchers define reverse mortgage “eligibility” as those retired households who do not already have a HECM, but who own homes with any value, and who have mortgages no greater than 40% of the home’s value.
Of the total 3,730 retired households analyzed by MIT researchers, about 55% are eligible for a HECM, according to the definition explained above. Among this group, 40% of households do not have retirement savings; while 14% have no (non-retirement) financial assets; 60% have no defined benefit plan income; and 66% are a couple.
“The bottom line is that from 12 to 14 percent of all retired households are eligible for, and might sensibly use, HECMs,” write researchers Mark J. Warshawsky and Tatevik Zohrabyan from the MIT Center on Finance and Policy.
MIT Researchers come to this conclusion after conducting several simulations aimed at determining which households stand to best benefit from reverse mortgages.
Finding the ‘best’ HECM candidates
In one simulation, researchers exclude households with gross home values of less than $100,000, on the view that the large fixed and variable initial fees and ongoing costs of a HECM make taking a “relatively small HECM not worthwhile.”
The researchers also excluded households with assets below the 30th and 80th percentiles of households in terms of potentially “annuitizable assets intervals.”
“The logic here is that low-asset households, even the relatively few who are house-rich, are not the best candidates for HECMs because the house still consumes resources for maintenance, taxes and insurance, as well as the general need of all retired households for contingency emergency funds,” the researchers write.
By contrast, households with significant financial and retirement assets that can be annuitized—other than housing assets— researchers found to be generally better served to avoid the HECM and to buy a commercial immediate annuity, that is, if they want or need to use their savings and non-retirement financial assets.
In a final combination of simulations, researchers find that only 19% of all retirement households are HECM-eligible, that is, they have home values greater than $100,000 and fall within the range (30th – 80th percentiles) of households with potentially annuitizable assets.
Moreover, researchers indicate about 26% of these latter households would receive only 10% or less in additional income from a tenure payment HECM. Therefore, the number of households for whom the HECM is clearly appropriate is “relatively small,” with about 12-14% of the retired household population considered as “truly good” candidates for a HECM.
Bigger market, bigger responsibility
While small, this share of potential reverse mortgage candidates is strikingly large relative to today’s current market penetration rate, which often has been published in research as representing only 2% of retired households holding HECMs.
“A 12 percent rate of penetration would increase the current size of the reverse mortgage market almost seven times over, and the retirement welfare of these elderly households could be significantly improved,” write Warshawsky and Zohrabyan.
At the median level, the researchers estimate that the annual income for these elderly households would be increased by about $6,000, or around 19%, with the use of a reverse mortgage.
The researchers also suggest that the welfare improvement of senior households could be even larger if the initial and on-going costs of the HECM were reduced in half—but only if this reduction in costs is not accomplished by a reduction in principal limit.
“Moreover, with a lowered principal loan limit, there is no longer as much of a need for government backing to the product because the default risk to lenders is lowered,” the researchers state. “This reduction in costs and fees could also possibly lead to a sustainable and innovative market to help retired households of modest means.”
But if coverage by long-term care insurance (LTCI) or a low bequest motivation are added into the mix, the percentage of households who can be expected to get a HECM falls further, to 4.6% or even as low as 1.3%.
“Retired households who are HECM-eligible are much more likely to give a high degree of importance to leaving a bequest, to be in excellent or good health, but more likely to be covered by LTCI than those who are not HECM-eligible, mainly those with relatively large mortgages remaining,” the researchers state.