The reverse mortgage industry continues to face headwinds in terms of widespread acceptance among financial planning professionals, but the growing prevalence of proprietary products and a growing base of both affluent and middle-income borrowers will go a long way in signaling how viable the products can be as tools for financial planning.
“Most of the research that my other colleagues have done in the past, going back to 2010-11, focused on the HECM. That’s the research that spurred some on changes over 7-8 years in the financial world, in terms of listening better to the value of reverse mortgages in a comprehensive retirement income plan,” says Jamie Hopkins, director of retirement research at Carson Group, in a webinar hosted on Thursday by RMD.
“I’d say the fundamentals of that research really applies to the proprietary world, even though the research doesn’t necessarily tie exactly to them,” he adds.
How proprietary products have forced reverse mortgage evolution
While much of the academic research in the reverse mortgage arena has focused primarily on the more traditional Home Equity Conversion Mortgage (HECM), much of that research also has bearing on the understanding of proprietary reverse mortgages even if the kinds of products are not entirely comparable based on some of their specific attributes.
“The notions of using [these products] to access large pieces of wealth for retirees to help with cash flow needs, to the sense of reducing costs of cash to outflow in other areas, all of those themes still apply [to both HECMs and proprietary products],” Carson says. “On the flip side, one challenge is that the math does change.”
Because many of the modern proprietary products are still so new to the industry, there hasn’t been enough time for an abundance of academic research to facilitate those products’ overall place in the reverse mortgage landscape, Hopkins says. While some of that research is currently happening, it will take more time to become more widely studied and available.
“It will be interesting to see if we do get more university-style academic research on [proprietary reverse mortgages],” Hopkins says. “There is a little bit going on right now, but nothing ready to go out right now. That’s something I’d say to keep looking forward to, and hopefully as these products get more stability and have been here for a bit, we’ll get more research there.”
Benefits of proprietary vs. HECM reverse mortgages
In terms of some core advantages that proprietary reverse mortgages may have over their HECM counterparts, one of them is the potential to reach markets that haven’t been able to be served before by more traditional reverse mortgage offerings, Hopkins says.
“You’re essentially opening up the base [of business] that you can grow from,” Hopkins says. Whether it’s on the higher end side, or what we used to refer to as the ‘jumbo loans,’ that’s where some of the proprietary market is going, that’s very appealing to that group. If you have a house in California or across the country where you’re multiple millions of dollars into it, the traditional HECM program isn’t all that appealing.”
On that higher-end side in terms of larger property values, the proprietary reverse mortgage becomes more appealing particularly to registered investment advisory (RIA) firms or financial planners that are geared more toward wealth management, Hopkins says. However, more proprietary offerings are also in a kind of competition with traditional HECMs by appealing to lower-end borrowers due to better loan conditions related to things like the mortgage insurance premium (MIP) or the draw on proceeds allowed in the first year.
“[We’re seeing more] products that [are] in competition with the HECM, which is a good thing,” Hopkins says. “I feel like the industry’s [position was] that the HECM was the best it was going to be, so it just stayed out of the [proprietary market for a long time]. Now we’re seeing some of those products come back in, including more interesting [variation in proprietary products] with more competitive rates and lower draw values. That’s going to be something to watch as interest rates move forward.”
The future reverse mortgage landscape, and its challenges
While the financial planning world is slow to adapt to any change, Hopkins says, the demonstrable increase in its discussions of HECM lending over the past several years may be accelerated with the addition of more proprietary reverse mortgage products.
“The total numbers won’t be there, but the dollar value going through will increase,” Hopkins says. “That being said, where I look out to the future of the reverse mortgage landscape, I think proprietary [developments] have been a very positive step forward. I’m very excited about it, honestly. I actually get more excited when asked about proprietary products over the HECM product right now.”
Still, some of the challenges for the future of HECM reverse mortgages are shared by the potential future of its proprietary alternatives: breaking through in a united front to be seen as a legitimate path toward wealth management.
“The challenge for the whole reverse mortgage industry going forward is: how do we take proprietary products and HECM, put them together and look more like we’re just a part of the traditional mortgage and lending world? I think the separate nature of this has been more of a hurdle,” Hopkins says. “The more we can feel part of using the home in a lending capacity is going to be very beneficial, and I think that proprietary helps that case moving forward.”
