Columbia Business School professor Christopher Mayer is so sure reverse mortgages can be a cornerstone of responsible retirement planning that he’s gone into the business. “It’s an enormous underserved market,” says Mayer, who is teaching fewer classes so he can be chief executive officer of Longbridge Financial, a startup reverse-mortgage lender. “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.”
A reverse mortgage is a loan made to a homeowner typically age 62 or older with no payments due as long as the borrower occupies the home. The lender aims to profit from fees when making the loan and the sale of the home when the borrower moves or dies. One danger is that the borrower will spend the proceeds too quickly, leaving nothing to live on. In 2012 the Consumer Financial Protection Bureau warned that retirees taking out assets as a lump sum through a reverse mortgage could find themselves impoverished later. Borrowers without the funds to pay property taxes and insurance could end up losing their homes, the agency said. In some cases, brokers have persuaded reverse-mortgage borrowers to invest the cash they received in dodgy financial products.
To address those issues, the Federal Housing Administration, which insures almost all reverse mortgages, instituted rules limiting the amount of equity borrowers can withdraw upfront. This year the agency will also 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 $88 billion in reverse mortgages the agency insures. Losses occur when homes sell for less than the loan’s amount.
“Those changes all make this a much more attractive business, and the product is a better product,” says Mayer. Longbridge, founded two years ago by former executives of New York Life Insurance and Fidelity Investments, is entering the business as reverse-mortgage lending plummets. Industrywide, originations fell to 60,000 in the U.S. government fiscal year 2013 from more than 100,000 in fiscal 2009 as Wells Fargo, Bank of America, and other lenders got out of the business and home values in some regions continued to decline.
Mayer was writing academic papers as early as the 1990s arguing that properly structured reverse mortgages could reduce poverty among the elderly. In addition to teaching and serving a stint as senior vice dean at Columbia Business School, he’s testified before Congress on ways to mitigate the effects of a 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?” he says. “There were many more things we could have done in housing, and almost everybody would agree that we didn’t do” them.
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 in Longbridge and sits on its board. 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,” says 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.”
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.
Under the new rules, borrowers will have access to only 60 percent of their equity at closing or during the first year of the loan. Even with those limits, homeowners need to be careful that they use the funds appropriately, says Stephanie Moulton, an associate professor at the John Glenn School of Public Affairs at Ohio State University. “It is becoming a different product than it was even two years ago, and it is a safer product, but there are still risks,” says Moulton, who is studying reverse-mortgage defaults. “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.”