Forward on reverse: Retirement finance in the age of HECM: “SHE” to the rescue ... Part I of a non-sequential series on how reverse mortgages are changing retirement finance

Authors note: The series Retirement Finance in the Age of HECM will look at how reverse mortgages (HECMs) are changing our notion of retirement finance. In retirement finance, we believe the 21st century is the Age of HECM. Reverse mortgages will play a critical role in the new retirement finance calculus, and we must understand this vital role to aid intelligent individual and societal planning.

There is promise. Hope exists for baby boomers facing the financial uncertainties of 21st Century retirement. Our most vital task is to convey this message as we go about our reverse mortgage business. Our optimism rests on this fact: SHE will pour trillions of extra dollars into the economy. For individuals and society alike, SHE will come to the rescue. But SHE is not Hillary Rodham Clinton. So who is SHE? Before we answer that question, let's visit with former Fed chief Alan Greenspan.

In chapter 22 of his memoirs, The Age of Turbulence, the former Fed boss looks at the economic challenges aging boomers pose for our economy in retirement. Greenspan says that we are at the edge of a demographic abyss for which there is no model. He calls the demographic transition underway in much of the developed world a tectonic shift and a truly 21st Century problem. The chapters tone is bleak.

As he sees it, the problem is one of imbalance between promises the government has made to boomers and the actual resources the economy must generate to fulfill them. With fewer skilled workers producing goods and services relative to the size of resource-consuming retired older adults, Greenspan cautions our economy is about to collide with economic reality.

The ex-central banker devotes much of the chapter to U.S. entitlements, especially the unfunded Medicare program. To stop the fiscal bleeding Medicare is causing the federal treasury, Greenspan predicts benefits will have to be cut or taxes must increase, or both. And he warns that the sooner our elected leaders decide, the better for the economy and for all of us.

Even more unsettling for prospective middle-class Medicare beneficiaries, Greenspan suggests Medicare may become a means-tested program. Means-tested is government-speak for welfare. Medicare as Medicaid? Friends, the times are changing.

Greenspan is not all demographic doom and gloom. He believes we will find ways to address the resource imbalance boomers retirement will bring about because we have no choice. The estimated $9.3 trillion in traditional retirement assets (old-style pension, 401Ks, and IRAs) at end of 2006 will help. He predicts private cash and insurance benefits will be on the table. Curiously, given the monumental private-funding role it will play, Greenspans analysis omits SHE. So, that brings us to SHE.

SHE stands for Senior Home Equity or home equity available to seniors 62 and older. In the Age of HECM, SHE is a critical individual and national resource that we must all learn how to cultivate, conserve, manage and use. We have always suspected it is an enormous if latent retirement resource. However, authoritatively quantifying it was problematic until June 2007, when the National Reverse Mortgage Lenders Association (NRMLA) and the Hollister Group LLC, a Washington, D.C.-based financial analytics and consulting firm, published the Reverse Mortgage Market Index (RMMI).

The index combines the Hollister Groups proprietary analytics with data from U.S Census, American Community Survey, Office of Federal Housing Enterprise Oversight (OFHEO), and Federal Reserve Board (FED Z-1 Reports) to create the one of the most authoritative estimates of senior home equity available in the U.S. today.

Lets look at some initial estimates of SHE:

*At June 2007, SHE stands at $4.3 trillion;
++SHE could hit $10 trillion by 2017; and
++Assuming 4.7 percent home appreciation rate, SHE is projected to top $37 trillion by 2030.

NRMLA EVP/COO Liz Scholz says the Hollister Groups analysts made an intriguing discovery in their research: Even at zero percent home-price appreciation, SHE will still jump to $9 trillion by 2030, solely on the strength of an aging and growing population.

Alan Greenspan is right: Private cash and insurance benefits will help. As the RMMI suggests, SHE could make up a significant part of those private dollars in the Age of HECM. That should be the message to our aging and growing customers. There is hope. Think reverse. Move forward!

Atare E. Agbamu, CRMS formed ThinkReverse LLC to help originators address demographic change via reverse mortgages. A specialist with Credo Mortgage and a member of the BusinessWeek Market Advisory Board, Atare is the first to propose reverse mortgages as risk-management tools for forward originators. Besides marketing, originating and researching reverse mortgages since 2001, Atare has authored more than 90 articles and a book on reverse mortgages. He may be reached by phone at (612) 203-9434 or e-mail [email protected].