Reverse mortgages and home equity lines of credit are two ways credit unions can help senior citizens and retirees tap home equity for more financial security.
Credit unions traditionally do not provide large volumes of reverse mortgages, but the demand for these financial products is growing as more seniors who have lost substantial retirement savings in other investments want to take out cash against their home’s value.
Nearly all reverse mortgages are made through the Home Equity Conversion Mortgage (HECM) Program, insured by the Federal Housing Administration. The program lets borrowers age 62 or older withdraw cash from their equity through a lump sum, fixed-term payments, or continuous payments for as long as they live in the home. Unlike other equity loan products, homeowners do not need to repay HECM’s until they sell the home or are no longer the primary owner. The FHA backed 79,106 Home Equity Conversion Mortgages in fiscal 2010, according to the National Reverse Lenders Association.
Credit unions held roughly 22% more reverse mortgages outstanding in the second quarter of 2011 than they did a year prior, or 488 as of June 2011 up from 401 in the second quarter of 2010, according to Callahan & Associates' Peer-to-Peer data. Credit unions reported about $45.5 million in outstanding reverse mortgages in 2Q2011, a $9 million increase from $36.2 million the year prior.
The number of total U.S. reverse mortgages has dropped in the past two years from a peak of 114,692 in 2009. This fiscal year presents a greater opportunity for reverse mortgages, an estimated 66,497 loans, than in 2000 when only 6,640 HECMs were granted or 2005 when 43,131 were granted. The opportunities to offer reverse mortgages will continue to grow as the population ages; an estimated 20% of the U.S. population will be older than 65 by 2050, according to the National Council On Aging.
More than 13 million seniors live on less than $22,000 per year, and for nearly 26% of that age group, social security is their only source of income, the NCOA reports. Reverse mortgages can help seniors suffering from the recession, which triggered an estimated $4 trillion decline in workplace retirement funds, by providing regular monthly payments they can use for care and medical bills.
A Home Equity Line of Credit can also help borrowers who want to tap their equity. Unlike an HECM, home equity lines of credits usually require borrowers to have an appropriate debt-to-income ratio and make monthly mortgage payments.
Callahan & Associates wrote about reverse mortgages in 2006, when the mortgages were taking off with 76,351 HECMs that year, up 77% from the year before. At that time, still only a few credit unions offered a reverse mortgage product but Callahan & Associates urged credit unions to “position the program as a member service for seniors and increase their loan originations at the same time.”