Columbia Business School Professor Christopher Mayer says he’s so convinced that reverse mortgages can be a cornerstone of responsible retirement planning that he’s gone into the business.
The loans were criticized by regulators including the U.S. Consumer Financial Protection Bureau after they were pitched to senior citizens needing quick cash under rules that allowed borrowers to take out and quickly spend most of their equity. Now, with new limits to curb up-front spending, they can help ensure retirees won’t outlive their assets, according to Mayer, who is teaching fewer classes at Columbia so he can be chief executive of a startup reverse-mortgage lender.
“It’s an enormous underserved market,” Mayer, 48, said of the money-making potential for the company, Longbridge Financial, in which he’s also a partner. “You have $3 trillion in housing wealth among older Americans. You have large institutions exiting the market, and more and more elderly with housing debt coming out of the crisis as well as other kinds of debt.”
Retirees may need to tap home equity as they live longer while relying on income from 401(k) and similar plans that are riskier than guaranteed payouts from employer pensions. Reverse mortgages, most of which are federally insured and limited to homeowners over 62, are intended to allow borrowers to gain access to more of their assets without having to move out of their homes. Payments aren’t due until the properties are sold.
Longbridge, founded two years ago by former executives of New York Life Insurance Co. and Fidelity Investments, is entering the business as loans plummet. Industrywide originations fell from more than 100,000 in fiscal-year 2009 to 60,000 in fiscal 2013 as lenders including Wells Fargo & Co. (WFC) and Bank of America Corp. got out of the business and home values continued to decline in some regions.
That came after years of controversy in the industry as some brokers convinced seniors to put their home equity into financial products that drew a red flag from state regulators and were eventually banned by the Federal Housing Administration, which insures close to 100 percent of new reverse mortgages.
The CFPB in 2012 issued a warning that retirees taking out their assets as a lump sum through a reverse mortgage could find themselves impoverished later in life. Borrowers without the funds to pay property taxes and insurance could end up losing their homes, the agency warned.
To address that issue, the FHA, an arm of the Department of Housing and Urban Development, instituted rules limiting the amount of equity borrowers can withdraw up front without demonstrating financial need. The agency also this year will start requiring lenders to verify that borrowers can afford to pay property taxes and insurance.
In addition to protecting consumers, the changes are intended to stem projected losses of $2.8 billion on the agency’s $88 billion reverse-mortgage portfolio.
“Those changes all make this a much more attractive business and the product is a better product,” said Mayer, who initially began as chief credit officer of Longbridge and took over as CEO last year.
Mayer, whose expertise is in real estate and financial markets, was writing academic papers as early as the 1990s advocating properly structured reverse mortgages to reduce poverty among the elderly. In addition to teaching and serving a stint as senior vice dean at Columbia Business School, he’s been a frequent participant in public policy discussions, testifying before Congress on ways to mitigate the housing-market meltdown.
“I was spending a lot of time doing policy work, and I was sort of feeling like at the end of the day, how does it come out?” Mayer said in a telephone interview. “There were many more things we could have done in housing, and almost everybody would agree that we didn’t do.”
Mayer isn’t the only academic involved in the company. Economist Alicia Munnell, director of the Center for Retirement Research at Boston College, is an investor and board member. Her research shows that the need for reverse mortgages will probably grow.
“In the past, people have not generally wanted to touch their home equity.” said Munnell, whose work has often focused on the inadequacy of retirement savings. “I don’t think that’s a pattern that’s going to be affordable going forward.”
Under the new rules, borrowers will have access to only 60 percent of their equity at closing or in the first year, limiting the appeal for people who are seeking a source of ready cash. Even with those limits, borrowers need to be careful that they use the funds appropriately, said Stephanie Moulton, an associate professor at the John Glenn School of Public Affairs at Ohio State University who is studying reverse-mortgage defaults and consumer decision-making regarding the loans.
“It is becoming a different product than it was even two years ago, and it is a safer product, but there are still risks,” said Moulton, whose research is funded by HUD and the John D. and Catherine T. MacArthur Foundation. “Any time you take an asset and you spend it, you have to have a good plan for how you’re going to spend that money.”
Mayer and Munnell say Longbridge will be reaching out to a pool of potential borrowers who are thinking about using their home equity to supplement their income, deal with health-care costs, or pay off higher-interest debt as part of a long-term plan.
Established reverse-mortgage firms often air ads on cable television starring celebrity pitchmen such as Henry Winkler, Fred Thompson, and Robert Wagner. Longbridge is instead seeking to expand through partnerships with mortgage servicers, firms that help consumers deal with health-care costs, and others that assist retirees with financial planning.
“Longevity risk is a significant issue, and if markets decline, you have a risk of running out of assets,” Mayer said. “Using only half of your assets if you’re a homeowner limits the kind of things you can do in retirement. Our vision as a company is to work with other companies to provide solutions to those problems.”
The approach at Longbridge is one that established reverse mortgage companies are also beginning to consider. Six lenders, including Liberty Home Equity Solutions and American Advisors Group -- the company that pays Thompson to appear in its ads -- are funding a branding campaign this year in an attempt to convince consumers to use reverse mortgages as part of a long-term plan instead of as an emergency source of funds.
“There’s been an emerging thinking over the past few years that home equity should be thought of as part of a comprehensive approach to managing personal finance through retirement,” Peter Bell, president of the Washington-based National Reverse Mortgage Lenders Association, said in an interview. “People shouldn’t come to a reverse mortgage last. Instead, they should work on a comprehensive plan for making sure their assets survive as long as they do.”
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