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January 2008

The Future Of Reverse Mortgages

While consumers are initially favorable and increasingly aware of reverse mortgages, high costs and other obstacles prevent many older homeowners from applying for these loans, according to a report released by AARP's Public Policy Institute (PPI). The report also warns about some lenders selling inappropriate financial products to reverse mortgage borrowers and recommends a series of remedies to increase consumer protections.

The market for federally-insured reverse mortgage loans has grown dramatically in recent years - increasing from 6,600 loans in 2000 to 107,000 loans in 2007. The loans allow older homeowners to borrow against their home equity without the need to repay until the last surviving borrower dies, sells the home or moves out permanently.

The AARP PPI study includes data from the first ever survey of reverse mortgage shoppers - older homeowners who had received reverse mortgage counseling and either took out a loan or decided against doing so. The report also includes a second survey of Americans age 45 and older to track changes in awareness of and attitudes toward reverse mortgages between 1999 and 2007. The surveys showed:

• Reverse mortgage borrowers are initially favorable about the loans. Ninety-three percent of borrowers said their reverse mortgages had a positive effect on their lives, and 63 percent said they would be "very likely" to recommend a reverse mortgage to a friend.
• Borrowers are using reverse mortgages to pay for necessary costs. By a margin of 48 percent to 38 percent, respondents who identified "necessities" as a reason for looking into reverse mortgages outnumbered those who cited "extras." Borrowers said they had many uses for the funds, but the main use cited by 19 percent was to retire an existing mortgage.
• Consumer awareness has increased in recent years, but interest in using reverse mortgages has actually decreased. Seventy percent of consumers 45 and older said they are aware of reverse mortgages (up from 51 percent reported by AARP in 1999). The share of respondents who said they were willing to consider the product declined over the same period from 19 percent to 14 percent.
• The high costs associated with reverse mortgages remain a serious concern and deterrent to shoppers. High cost was the most frequently identified deterrent (63 percent) for shoppers who ultimately decided against applying for the loan. More than two thirds (69 percent) of the actual borrowers surveyed said that costs were high.
• Reverse mortgage lenders may be depleting the home equity of borrowers by offering inappropriate financial products. Nine percent of borrowers said their lenders had offered them specific financial products - including annuities and long-term care insurance - which may be unwise investments given the costs and purposes of the loan.

The report also offers recommendations to make reverse mortgages more of a mainstream financial instrument, including reducing costs and building consumer confidence in the program, encouraging product innovations to meet the growing diversity of consumer needs, increasing funding for consumer counseling and information and improving the marketing practices of lenders.

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