The Reverse Mortgage Market: A Quick and Easy Meta-View
by Monte Rose, CSA

The reverse mortgage industry has witnessed unprecedented growth in the past few years. About one-third of the home equity conversion mortgage (HECM) loans, since Congressional authorization 20 years ago, were made in 2007 alone. Two-thirds of total insured loans have been funded in the past three years. Despite this progress, less than 1% of the potential 30.8 million households with a senior 62 years or older have used this tool.

Major players in the financial services industry are gearing up for this market and capital is flowing. Greater scrutiny of the market will only intensify in the next few years.

The burning question is whether the reverse mortgage concept will continue to be seen as a last resort for meeting necessary medical and living expenses or whether it will develop into a strategic funding mechanism to enhance the client’s quality of life. This was exactly what a recent AARP survey set out to answer. The study looked at the buying motivations of borrowers as well as homeowners who looked into the product, but decided not to proceed.

Half of the borrower sample looked into the reverse mortgage product because they needed more money for necessities and essential expenses, while 38% were motivated by a desire to have more money to spend on extras in order to improve their quality of life.

When it came to the actual use of the loan, paying off an existing mortgage, making home repairs and improvements, improving quality of life, or meeting everyday expenses comprised 61% of the borrowers’ main uses for the product.
Seventy-five percent said they were in good to excellent health, while 22% said their health was fair to poor. Borrowers who were in good to excellent health were more likely to use reverse mortgages for investment and insurance purposes compared to those who reported being in poor to fair health. The less healthy were twice as likely to consider a reverse mortgage for health or medical reasons. The categories of need for this group included paying for prescriptions, home care, medical equipment, hospital stays, and nursing home use.

While 13% of borrowers looked into reverse mortgages as a way to fund investment, annuities, or long-term care insurance, only 2% of borrowers saw it as the main reason for considering reverse mortgages. Four percent actually used their loans to fund these products. This means that the conversion rate is about 30% for clients who are looking into a reverse mortgage as a funding source. This is worth noting since AARP’s consumer guide cautions against using reverse mortgages to fund the purchase of investment products or long-term care insurance.

Policymakers have shown some interest in the concept of using reverse mortgages to purchase long-term care insurance. However, AARP estimates that using a reverse mortgage to fund the purchase of long-term care insurance would add roughly two-thirds to the monthly cost of a policy initially, double the monthly cost after year 10, and more than triple the monthly cost by year 20 of the loan. However, the cost of financing risk transfer is sure to be less than the financial and non-financial cost of not transferring the risk.

How Will The Market Affect My Business?

Let’s assume that the 1,509 people in the AARP sample represented the universe of borrowers along geographic and demographic lines. What market opportunities and challenges does the survey reveal?

AARP and the National Reverse Mortgage Lenders Association (NRMLA) have expressed a serious concern about the potentially risky bundling of products. Suitability is becoming an increasingly charged concept. Most financial professionals do the right thing. But it’s sobering to consider the prospect of a renegade creating a 60 Minutes-type fiasco that damages the industry’s credibility. The concern about financial abuse is reasonable because we are dealing with a protected class and a sometimes--vulnerable population.

The differentiated market for reverse mortgages is an opportunity that is easy to miss. Healthy and financially secure seniors are apt to use a reverse mortgage to finance increased longevity and retirement needs (life stage planning). The AARP study indicates that seniors with higher household incomes and financial assets are more likely to consider the reverse mortgage product for quality of life reasons rather than survival needs.

By the same token, seniors who are in financial and medical distress look at reverse mortgages as a timely solution to their problems. The reverse mortgage becomes a component in their life stage plan, which enables them to live in their own home as long as possible. In both instances, customer satisfaction is extraordinarily high with 93% of customers surveyed by AARP saying that the reverse mortgage had a positive effect on their lives.

As the market matures, there will be a formal way to differentiate these two segments so that product bundling and cross selling will not be seen as dangerous for the senior customer. Counselors and other fiduciary players who become more conversant with the reverse mortgage concept will have a greater appreciation for matching client needs and wants to certain product combinations. Also, reverse mortgage products will become more differentiated based on risk and costs.
For example, high socioeconomic status, self-actualizing seniors might not see the relatively high cost of reverse mortgage as a deterrent. Though cost is a straightforward concept and easily measurable, value is more elusive. Value depends on goals, expectations, and lifestyle. How do you define the value of security, independence, and peace of mind? Market segmentation that is attuned to the aging process is a key determinant.

Self Insurance

Those who don’t qualify for long-term-care insurance coverage can use a reverse mortgage as a form of self-insurance. The survey reveals that the reverse mortgage product is seen as a way to meet emergencies and other unexpected events. The reverse mortgage can serve as tool for productive aging while providing a safety net. When seen from this perspective, bundling the reverse mortgage with other suitable financial instruments may actually become a fiduciary requirement. There is no single definition of successful aging and product strategies must evolve as we understand more completely the repercussions of increased longevity.
People tend to view reverse mortgages as vulnerable products that can easily be tarnished by unscrupulous people. While this is partially true, the long-term solution is to create more diverse product offerings. In the long run, competing brand identities of different reverse mortgage categories and products will make the market more durable and robust.

The Coming Wave of Boomers

The AARP survey is a snapshot of existing borrowers. However, this profile will change because of the different lifestyle and values of the next generational wave of Baby Boomers.

More importantly, the buying landscape will change drastically as Baby Boomers qualify for reverse mortgages. Positioning investment and risk management products alongside reverse mortgage options might not necessarily have the same negative effect in the near future. It is going to be simply a matter of providing more product solutions, as required by the customer. Convenience, such as Web-based purchase channels, will be a critical factor.

The reverse mortgage product will cease to be seen as a last resort product.
Based on the examples of other industries, such as technology and communications, senior market advisors will provide dynamic solutions to financing the aging process.
In this case, the reverse mortgage can be seen as simply an element of a more sophisticated portfolio approach to finance productive aging.

What is particularly useful about the AARP study is what it doesn’t tell us. It does not explain borrower behavior and life stage development. The demographic categories that were used in the AARP study do not recognize the four parameters of the aging process: biological, cognitive, social, and psychological aspects and does not take into account the life events that trigger shifts in these areas.

Why is this important? With non-senior adults, having insight about a product’s use is sufficient to create a useful strategy. However, in the mature market, product use is inextricably tied to four parameters of the aging.

Product use is just the tip of the iceberg. For example, debt retirement may be a clear category for the application of reverse mortgage products. Use has to be interpreted from a gerontological-developmental perspective. Therefore, the marketer has to see the client’s location on this developmental map as the basis for understanding purchase decisions and consumption behavior. It is precisely this location that determines the client’s trade-offs and utility curves for the product.
Where do these observations lead us? Simply this: the current dearth of information in this market creates opportunity for swift, decisive, and profitable strategic action.

Practical Take-aways.

1. Understand the reverse mortgage landscape. Equity conversion is here to stay.
2. Get to know your local reverse mortgage professional. Productive affiliations with these trusted specialists can only enhance your value in the marketplace.
3. Understand gerontological market segmentation and the mature market buyer. This is what the “niche to get rich” dictum is all about.
4. Translate and apply market segmentation insights into an effective marketing strategy. (You must have a map to get to your destination!)
5. Understand the conversation in social and financial gerontology to gain insight into the mature market space. The more you know about the market’s motivation, the better you will serve the client.
6. Learn the art and science behind the kitchen table conversation. There is a systematic method to connect and present successfully to the mature market customer. The previous items on this list serve as the foundation for developing strong customer engagement and referral strategies after sitting with your client at the kitchen table.
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Monte Rose has helped hundreds of seniors obtain a reverse mortgage during the past 15 years. He is an accomplished speaker and widely quoted industry expert, appearing in financial publications and nationally syndicated media. He was head of national retail sales for Financial Freedom Senior Funding Corp. Monte is a Certified Senior Advisor, a Certified Strengths Coach with Gallup University, and holds a Bachelor of Business Administration from Evangel College. His Professional licenses include Real Estate Broker, CA Department of Real Estate and Life/Health, CA Department of Insurance. Monte also is a member of the National Reverse Mortgage Lenders Association. For more information, call 800-516-0545 or email info@monterose.biz.