The reverse mortgage concept is active around the world. While different countries see different rates of success in reverse mortgage loans, analysts and researchers from institutions such as the World Bank and the Brookings Institution see greater potential for reverse mortgage products to provide solutions to increasingly insolvent seniors both inside and outside the borders of the United States.
However, there may be some lessons from other parts of the world involved in the product category that can help streamline the operation of domestic reverse mortgages, and at least one American lender has already learned some lessons from the way how home equity release works in the uk. This was said by Chris Mayer, CEO of Longbridge Financial, during his discussion at RMD’s HEQ event earlier this month.
In many other parts of the world that offer reverse mortgage products, the name itself is not a predominant descriptor for the product category, says Mayer. Like here, there is a perception that goes with the name “reverse mortgage” that many other lenders in other parts of the world have relied on a different nomenclature.
“In most of the world, this is called equity release, not reverse mortgage,” said Mayer, VP of Content for Aging Media Network, Elizabeth Ecker, during the event. “Elsewhere, like here, reverse mortgages have a flaw in their name that isn’t perfect.”
Most countries offer mortgage or debt-based products, especially the largest countries, Mayer explains.
“If you look at the most popular places around the world, the UK is probably the biggest,” says Mayer. “On a relative basis, on a per capita basis, the UK is about five times the size of the US. Probably my favorite statistic in the UK is that a year ago about 36% of all mortgages to anyone over 55 were equity-released mortgages. “
This statistic makes a big difference to the reverse mortgage loan penetration market in the United States. According to HMDA data, there were 1.3 million new mortgages in 2018, including home equity lines of credit (HELOCs), traditional mortgages, and purchase loans that the typical demographics of customers aged 62 and over, says Mayer.
When comparing the percentage of home equity penetration between the US and the UK, there are very few comparisons, he explains.
“So in 2018 there were around 36,000 reverse mortgages and 1.3 million traditional mortgages,” says Mayer. “So if you think about that market share, it’s really 2.5%. In the UK it is 36%. So, [there is an] enormous difference. “
How the UK structures the share release
Some of the other differences that can help explain this difference is the way the Home Equity Release products are structured on a compliance basis, Mayer explains. Differences in lending illustrate this.
“When [lenders in the U.K.] when they subscribe to a product, they have to show that someone can make payments for the life of the loan, ”explains Mayer. “And for someone over 60 and not expected to work during the life of the loan, they actually need to demonstrate that the person (s) is able to make the payments on their retirement income . There is a very, very big difference between here and there. “
If people took out senior mortgages and at the same time realized that a 30 year old product might not be suitable for someone in their early to mid 60s, many would realize that a traditional senior mortgage might not be a very suitable product. This is especially true when you consider that if they’re not working, they can make payments during the life of the loan, says Mayer.
“This is a huge difference between the US and the UK, and one of the reasons reverse mortgage / equity release companies have been so attractive.” [is] realizing that you are making a payment to someone that you really need to make due to their ability to make those payments in retirement, including [with] Retirement income, ”says Mayer. “When People Have Trouble Qualifying For A Financial Assessment – What Some Borrowers Do Here” [in] just making tax and insurance payments – you can imagine that for a lot of these people it doesn’t make much sense to put them on a traditional mortgage. “
Another difference between the US and UK reverse mortgage markets is in the approaches to financial planning, where UK planners can be licensed and paid to offer reverse mortgages the way they would any other product, Mayer says.
“I know this is an abomination [in the U.S.]“Says Mayer. “We have RESPA and a lot of problems here. But […] One of the challenges for planners, I suspect, is that it is difficult to offer a product that is in the best interests of the customer. We’ve had more and more financial planners working to the best of interests or even a fiduciary standard, but still many of them get paid to offer almost every other product and so it makes a difference. “
This is not to say that American standards for paying planners should change, just to highlight the differences between the two countries, Mayer explains.
Financing through insurance, no securitization
A final highlighted difference between the two territories is that mortgages in the UK are “mostly” funded by insurance companies, Mayer says. This has some specific advantages over securitization financing, he says.
“There’s a stability associated with products that are funded by regulated companies, not securitisations, which can do well [or] can do badly, ”explains Mayer. “Reliance on securitisations struggles when markets melt together. In Great Britain, the overwhelming dependence on insurance companies – and also on pension funds – is associated with a certain degree of stability. It’s also longer-term capital. You see the market a little differently. “
In countries like Canada and Australia, as well as in many parts of Europe, the products are mainly financed by banks. This is also a difference, but this model can have its own problems, says Mayer.
“Banks are not the perfect solution because banks finance with short-term deposits,” says Mayer. “And when they have problems with deposits, when regulators face challenges, their deposits are short term. They can come in, they can go out, they compete with money market funds. Financing things with shorter term funding Reverse Mortgage Daily can sometimes be less reliable. “
This was a lesson Longbridge learned and applied to its own proprietary reverse mortgage suite of products, Platinum, backed by longer-term funding companies, says Mayer.
“I think the longer term funding kept the product in the market, and certainly in the UK during tough times,” he says. “Trust in securitisations, on the other hand, works until it no longer works. And if not, there are problems. And these are, at least for me, some of the lessons that we humans can take with us in other places. “