Reverse Mortgages and Linked Securities: The Complete Guide to Risk, Pricing, and Regulation

CHAPTER 5

Risk Mitigation from Existing and Proposed Financial Products

Nemo Perera Managing Partner, Risk Capital Partners, LLC

 

 

 

 

Current trends in U.S. demographics suggest that the market for reverse mortgages will grow dramatically in the next decade as Baby Boomers cross into the qualifying age of 62. Given the recent challenges facing traditional mortgage originators from tighter credit and lending standards, reverse mortgages will see stronger interest from both lenders and investors (see Figure 5.1).

Growth can be attributed to the following primary drivers:

• The credit crisis and low-to-negative HPA (home price appreciation) has crippled origination volume and profitability in traditional mortgages.

• Baby Boomers,¹ the fastest growing cohort, have locked up vast amounts of home equity:

• As of 2005, over 12 million senior households were free and clear of mortgage debt while only 12 thousand had reverse mortgages² (Figure 5.2).

Over the next 5 years, 13 percent of the population will be 65 or older, and this cohort is expected to be 17.7 percent of the population by 2025 (Figure 5.3).

Over 80MM people are due to start retiring in 2009.

• Reverse mortgages can provide essential financing to seniors as the public financial infrastructure erodes, as well as allow them to reside in comfort of their homes indefinitely.

• The United States will not be able to grow its way out of long-term fiscal imbalances posed by rising health-care costs and the aging of the population.³