Moving beyond HECM in equity release markets?
The future equity release market will offer far greater opportunities than those presented by the current market, which has been defined by its narrow product and distribution focus.
Propelled by strong demand and a substantial injection of capital into the industry, the reverse mortgage market has been one of the recent success stories in US retail financial services. Originations of reverse mortgages sponsored by the Federal Housing Administration (FHA) have grown rapidly, from less than 10,000 in 2000 to more than 100,000 in 2007.
However, the US market for senior home equity products is dominated by a single type of reverse mortgage. The US market is also underdeveloped compared to other markets, particularly Australia and the UK, offering a very narrow range of products and operating through only a small fraction of the available distribution outlets.
? looks at the reverse mortgage market and argues that although new capacity has deepened the market, it has only slightly broadened it. The US market is overwhelmingly led by home equity conversion mortgage (HECM) products, which offer significantly more generous loan-to-value (LTV) ratios than either jumbo products or comparable products in foreign markets. In some subsegments, such as HECM products for those over the age of 80, LTVs can be twice as high in the US as they are in the UK or Australia. Many lenders have recently reduced their HECM interest rate margins, which has produced even higher LTVs and may be driving additional sales.
Until the housing market stabilizes, lenders are unlikely to have much appetite for the increased risk arising from new or redesigned products and pricing. This suggests that HECM products will continue to dominate sales of reverse mortgages. However, it is quite sobering to realize that the government is effectively determining the risk appetite of the vast majority of the reverse mortgage market. Should this appetite change, either organically or as a consequence of FHA losses in the HECM program, the market could be severely disrupted.
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