The significant financial security disparity between women and men is well known. Despite pursuing higher education in greater numbers and working more hours, women earn only 82 cents on the dollar compared to men, with women of color earning even less on average. The contrast between women’s and men’s lifetime earnings is even more stark, with bachelor’s degree holding .
Even for women who have shattered the glass ceiling, the reasons for gender wage disparity are all too familiar. Women perform unpaid and uncounted work, such as childcare and household management, in outsized numbers. According to Morningstar’s 2020 report on women and investing, women are more likely to sacrifice career and earnings to care for an elderly relative, with adult daughters twice as likely to act as informal long-term caregivers to parents than adult sons.
Despite the attention given to the gender wage gap, little ink is dedicated to the sobering reality that reduced earnings imply women are at greater risk of not achieving financial security in retirement. Because they earn less and must make their money last longer (U.S. women outlive men by five years on average), women tend to be in worse shape than men on nearly every important retirement metric.
The point in articulating gender wage disparity is to drive home that retirement readiness is a women’s issue, and that, as mortgage lenders, we are uniquely positioned to match women with home lending programs that help them attain their financial goals as they age.
Enter the HECM
In particular, the Home Equity Conversion Mortgage (HECM) is an FHA-insured loan program designed specifically to meet the needs of aging homeowners and can offer substantive benefits to older women. However, in light of the lingering stigma attached to the HECM lending program (more on that in a moment), many lenders do not offer it and subsequently many mortgage professionals are unfamiliar with the program. Our industry’s knowledge gap around HECM loans does a disservice to older homeowners and particularly to female homeowners who would benefit from tapping into their housing wealth as they age, especially since single women are the second leading purchaser of homes.
But before launching into why HECMs should be a staple program in most lenders’ portfolios, I’d like to do my part in closing the HECM knowledge gap by providing context around why the program was created and how it has evolved into the valuable tool it is today.
The very first reverse mortgage was invented in 1961 by a lender who wanted to help his high school football coach’s wife, Nellie Haynes, stay in her home after her husband passed away. In fact, guaranteeing Americans like Nellie a secure way to age in place was the reason the Reagan administration created the FHA-insured HECM program in 1988.
In essence, the HECM program was created out of a desire to meet the unique financial and homeownership needs of older Americans and provide lenders with a distinct opportunity to foster lifelong relationships with their customers and communities. These are just some of the reasons that lenders originating HECM loans today find the program to be fulfilling for both their customers and their business.
Unfortunately, in its early years the HECM program was different and not without its flaws. Though insured by HUD, early HECMs had fewer consumer protections. But the 2008 financial crisis highlighted the need for consumer protections, and since — like many other lending programs — HECMs have undergone a significant facelift to mitigate risk to both borrowers and lenders.
One of the most substantial improvements to the HECM program is called the Financial Assessment (FA), which requires HECM lenders to review a borrower’s ability to pay property taxes, insurance and HOA fees as part of the loan qualification process. If a borrower’s credentials are weak, lenders have the option to set aside a portion of the loan proceeds to ensure payment of property taxes and insurance in an account called a life-expectancy set-aside (LESA). This tactic is very similar to impound accounts seen in traditional “forward” mortgages.
Other improvements to the HECM program include stronger nonborrowing spouse protections, adjustments to the amount of funds that can be disbursed in the first year of the mortgage and the impact of that disbursement on the cost of the borrower’s mortgage insurance premium (MIP). Unlike the property mortgage insurance (PMI) issued for a traditional mortgage, MIP protects the lender and the borrower. New limits on first-year disbursements encourage borrowers to use HECM proceeds over time, in a sustainable way.
How HECMs Can Help
As Americans plan for retirement, we typically expect Social Security and personal savings, such as 401(k) and IRA accounts, to serve as the primary sources of retirement income. But there’s another potential source of income many of us forget about — even though, like Social Security, we pay our own money into it for much of our lives. That income source is our home equity. (It should be noted that due to a lifetime of lower earnings, women’s social security payments average 20% less than men’s.)
With a HECM line of credit, homeowners can withdraw HECM funds and pay them back as often as they want with no prepayment penalties or tax repercussions. By drawing on the HECM line of credit instead of 401(k) savings whenever financial markets are down, consumers can significantly improve their retirement income and estate value at end of life. In fact, a 2012 study by Salter, Pfeiffer and Evensky found that homeowners entering retirement with both home equity and a retirement savings nest egg could improve the “survival rate” of their savings over a 30-year horizon by as much as 85% using a HECM line of credit as an alternate source of income in times of poor stock market performance.
Best of all, a HECM credit line grows over time, automatically making more funds available to the borrower as an additional source of retirement income. For a typical borrower today, the growth rate of a HECM line of credit averages in the 5% to 6% range per year. This feature makes the HECM line-of-credit loan behave more like an additional investment than a traditional loan and can help level the playing field for women during the retirement years.
It’s worth mentioning that with interest rates hitting new lows and housing equity on the rise, now is opportune time for qualified homeowners to leverage the HECM. This is especially true since another benefit of the HECM is that it is a nonrecourse loan, so if a borrower were to take out a line of credit based on the value of their house today and tomorrow property values fall, the homeowner can maintain their original line of credit.
At the end of the day, a reverse mortgage secures homeowners’ residences from being foreclosed on for missing a monthly payment. It can also provide a line of credit that grows every year and can be used as borrowers need it. Ultimately, lenders seeking to meet the needs of borrowers as they age would be well served — and would serve their customers well — by not only offering HECM loans, but also seeking a deeper understanding of the product and how women can best leverage a HECM to achieve financial objectives in their senior years.