Impediments to Home Equity Extraction NRMLA 2016 Annual Laurie - - PowerPoint PPT Presentation

Laurie Goodman Co-Director, Housing Finance Policy Center Urban Institute NRMLA 2016 Annual Meeting and Expo Chicago, Il November 16, 2016

Existing Mechanisms & Impediments to Home Equity Extraction

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Americans have a staggering amount of untapped equity in their homes

Age group Total net housing wealth Wealth accessible upto 85% CLTV Wealth accessible upto 75% CLTV

18–29 $159 $107 $83 30–39 748 $479 $345 40–49 1660 $1,172 $894 50–59 2678 $2,051 $1,666 60–64 1428 $1,135 $950 65–69 1348 $1,089 $923 ≥70 3008 $2,494 $2,158 Total $11,030 $8,527 $7,018 65 and Older $4,356 $3,582 $3,080

Net Housing Wealth for Owner-Occupied Housing Units, by Age Group, 2015 (billions)

Source: Li, Wei, and Laurie Goodman. How Much House Do Americans Really Own?. 2016. Washington DC: Urban Institute.

Age group Total number of housing units Units with equity accessible upto 85% CLTV Units with equity accessible upto 75% CLTV

18–29 2,593,788 1,566,268 1,145,027 30–39 9,477,887 5,909,133 4,253,343 40–49 13,863,045 10,031,195 8,308,589 50–59 17,403,755 14,145,581 12,775,687 60–64 8,169,867 7,005,120 6,559,898 65–69 7,105,658 6,274,613 5,965,109 ≥70 14,672,714 13,776,590 13,441,880 Total 73,286,714 58,708,498 52,449,533 65 and Older 21,778,372 20,051,203 19,406,989

Number of owner-occupied housing units with extractable equity, by age group, 2015

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Yet, the vast majority are not interested in extracting equity

How interested are you in tapping into your home equity in retirement? Which of the following ways of taking equity out of your home are you familiar with?

55+ 55-64 65-74 75+ 55+ 55-64 65-74 75+ 55+ 55-64 65-74 75+ Unweighted Base 1071 427 356 288 569 185 214 170 502 242 142 118 Base 1071 471 343 257 546 171 182 193 525 300 161 64 Very interested 2% 3% 1% 2% 1% 3% 0% 1% 2% 3% 2% 2% S

• mewhat interested

4% 6% 3% 4% 4% 4% 2% 4% 5% 6% 4% 3% Not very interested 10% 11% 9% 8% 8% 7% 8% 9% 12% 14% 10% 5% Not at all interested 80% 78% 81% 84% 84% 84% 85% 81% 77% 75% 76% 90% Don’t know 3% 2% 6% 3% 3% 2% 4% 3% 4% 2% 8% 0% ALL HOMEOWNERS OUTRIGHT HOMEOWNERS HOMEOWNERS WITH MORTGAGE 55+ 55-64 65-74 75+ 55+ 55-64 65-74 75+ 55+ 55-64 65-74 75+ Unweighted Base 1071 427 356 288 569 185 214 170 502 242 142 118 Base 1071 471 343 257 546 171 182 193 525 300 161 64 Reverse mortgages 49% 49% 53% 46% 48% 45% 55% 43% 51% 51% 51% 53% Home equity loans or home equity lines of credit 62% 71% 66% 41% 52% 57% 65% 36% 73% 79% 67% 57% Cash-out refinancing 36% 38% 41% 28% 31% 30% 40% 24% 42% 42% 43% 40% None of the above 23% 19% 21% 33% 29% 25% 24% 37% 17% 15% 18% 21% Don’t know 4% 3% 4% 5% 4% 3% 3% 6% 4% 3% 6% 2% ALL HOMEOWNERS OUTRIGHT HOMEOWNERS HOMEOWNERS WITH MORTGAGE

Source: Fannie Mae National Housing Survey

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Homeowners have several concerns about tapping equity via borrowing

If you were going to take equity out of your home in retirement, which method or methods would you prefer? What, if any, are your main concerns about tapping into your home equity in retirement?

Source: Fannie Mae National Housing Survey

55+ 55-64 65-74 75+ 55+ 55-64 65-74 75+ 55+ 55-64 65-74 75+ Unweighted Base 1071 427 356 288 569 185 214 170 502 242 142 118 Base 1071 471 343 257 546 171 182 193 525 300 161 64 Reverse mortgages 6% 5% 6% 8% 6% 4% 4% 8% 7% 6% 7% 7% Home equity loans or home equity lines of credit 16% 19% 17% 11% 15% 18% 17% 10% 18% 20% 16% 13% Cash-out refinancing 4% 5% 6% 2% 2% 1% 4% 2% 6% 7% 7% 1% S elling your home and purchasing a less expensive one 35% 42% 32% 28% 33% 36% 37% 27% 38% 45% 26% 31% S elling your home and renting 12% 11% 10% 15% 11% 9% 8% 15% 12% 12% 11% 17% None of the above 26% 23% 27% 32% 31% 31% 29% 33% 21% 18% 25% 28% Don’t know 6% 3% 8% 9% 6% 4% 5% 9% 6% 3% 12% 7% ALL HOMEOWNERS OUTRIGHT HOMEOWNERS HOMEOWNERS WITH MORTGAGE 55+ 55-64 65-74 75+ 55+ 55-64 65-74 75+ 55+ 55-64 65-74 75+ Unweighted Base 1071 427 356 288 569 185 214 170 502 242 142 118 Base 1071 471 343 257 546 171 182 193 525 300 161 64 I want to save it to give to my children or heirs 19% 19% 19% 19% 19% 18% 20% 19% 19% 19% 18% 20% I want to save it for an emergency 10% 10% 11% 7% 9% 12% 8% 8% 10% 9% 13% 4% I don’t need the money 30% 25% 29% 41% 35% 33% 29% 43% 25% 20% 29% 36% I don’t want to have the debt 36% 40% 39% 27% 35% 36% 41% 27% 38% 42% 37% 28% I don’t have enough income to qualify for additional debt 7% 8% 7% 6% 5% 4% 4% 6% 9% 10% 10% 5% I don’t have enough equity to qualify for additional debt 5% 6% 4% 3% 3% 3% 4% 2% 6% 7% 5% 6% Other 3% 2% 3% 4% 3% 3% 4% 3% 2% 1% 1% 9% Don’t know 5% 4% 6% 5% 5% 5% 4% 5% 5% 3% 8% 4% ALL HOMEOWNERS OUTRIGHT HOMEOWNERS HOMEOWNERS WITH MORTGAGE

What, if anything, concerns you the most about reverse mortgages?

55+ 55-64 65-74 75+ 55+ 55-64 65-74 75+ 55+ 55-64 65-74 75+ Unweighted Base 548 210 193 145 277 83 117 77 271 127 76 68 Base 528 230 181 117 260 78 99 83 268 152 82 34 I’m not sure if I will still keep the title to my home 5% 5% 5% 3% 5% 6% 5% 4% 4% 5% 4% 1% I’m worried that my family won’t be able to stay in our home if I pass away 11% 9% 14% 11% 9% 6% 12% 10% 13% 11% 17% 15% They are too costly 12% 13% 10% 12% 11% 12% 12% 9% 13% 13% 8% 20% They are difficult to understand 9% 10% 8% 11% 12% 16% 8% 13% 7% 7% 8% 6% I’m afraid of getting scammed 20% 24% 18% 16% 18% 21% 17% 17% 22% 26% 18% 15% Don’t know VOL ALL HOMEOWNERS OUTRIGHT HOMEOWNERS HOMEOWNERS WITH MORTGAGE

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Source: Fannie Mae National Housing Survey

Mean equity extraction origination rate as a proportion of population 62 and older

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Source: Moulton, Dodini, Haurin, Schmeiser (2015)

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Reluctance to tapping equity is not driven by a shortage of equity extraction mechanisms

Borrowers have access to several equity extraction products to suit different needs and circumstances

• Reverse mortgage products
• Home Equity Conversion Mortgage
• Proprietary reverse mortgages
• Forward equity extraction products
• Home equity line of credit (HELOC)
• Closed-end second liens
• Cash-out refinance
• Borrowers can also access home equity by selling and downsizing/renting

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Equity extraction is adversely affected by a mix of structural and behavioral impediments

• Very limited demand
• Strong aversion to debt among seniors
• Desire to leave a bequest or to save for emergencies
• Seniors are working well into old age as evidenced by the rising labor force participation
• Inadequate financial literacy
• Reverse mortgages are complex, have too much optionality, & are difficult to understand
• Prevalence of scams and misleading advertisements discourages seniors
• Todays’ reverse mortgage lenders have almost no brand recognition
• High cost relative to forward mortgage products
• Even with todays ultra-low rates, annual borrowing cost for reverse mortgages about 5.5 to

6.5 percent.

• Compounding of interest increases costs even further
• In multiple surveys, borrowers have singled out costs as a major barrier
• Insufficient credit availability
• Changes to HECM disbursement rules and verification of ability to pay taxes/insurance
• Exit of large lenders from reverse mortgage lending
• Forward equity lending also impacted by tight credit

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Reducing structural barriers to equity extraction

• Improve reverse mortgage financial literacy, education and outreach
• Introduce individuals to reverse mortgages earlier in life (via retirement planning)
• Education and outreach efforts by Social Security Administration
• Require lenders to refer borrowers to HECM counseling as the first step after initial contact
• Introduce different types of counseling for different borrowers, based on financial

sophistication and income

• Reduce reverse mortgage costs
• Simplify design by phasing out rarely used options like tenure annuities
• Reintroduce a modified version of HECM Saver with lower borrowing limits and lower

premiums

• Put a term limit on line of credit disbursement option to reduce lender uncertainty
• Create tools that make it easier for borrowers to compare reverse mortgage rates and

encourage them to shop around; this could improve competition between lenders

• Improve liquidity of HECM MBS by marketing them as an alternative to US Treasuries
• New product development
• Convert a portion of home to rental
• Shared appreciation mortgages

HMBS issuance is tiny relative to forward mortgage products

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$836 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 Sep-16 Aug-16 Jul-16 Jun-16 May-16 Apr-16 Mar-16 Feb-16 Jan-16 Dec-15 Nov-15 Oct-15 Sep-15 Aug-15 Jul-15 Jun-15 May-15 Apr-15 Mar-15 Feb-15 Jan-15 Dec-14 Nov-14 Oct-14 Sep-14 Aug-14 Jul-14 Jun-14 May-14 Apr-14 Mar-14 Feb-14 Jan-14 Dec-13 Nov-13 Oct-13 Sep-13 Aug-13 Jul-13 Jun-13 May-13 Apr-13 Mar-13 Feb-13 Jan-13

HMBS Issuance (millions) Gross Issuance (millions)

Ginnie Mae HMBS Issuance (left) Ginnie Mae Gross Issuance (right) $36,060 Sources: eMBS, Ginnie Mae