Canada’s reverse mortgage providers were, like virtually every other entity involved in real estate in 2020, inundated with requests from new and prospective clients. The economic upheaval triggered by COVID-19 may have taken its toll most directly on lower-wage workers – not exactly reverse mortgage’s target demographic – but it’s little surprise that Canadians nearing, or well into, retirement would want to access the equity in their homes as a way of supporting their children and grandchildren through an extended period of economic pain.
But in speaking with representatives from Canada’s two leading reverse mortgage providers, HomeEquity Bank and Equitable Bank, the rise in demand for reverse mortgages is no pandemic fluke. Neither HEB nor Equitable is preparing for a decrease in business once COVID-19’s in the rear-view mirror; both wholly expect to keep their foot on the gas, in 2021 and beyond.
The year that was
Paul von Martels, vice president at Equitable Bank, said 2020 was an “important” year for the company, but “watershed” may be more accurate. As reported in filings with the Ontario Superintendent of Financial Institutions, Equitable’s reverse mortgage portfolio doubled between November 2019 and November 2020.
“We saw the opportunity presented and moved on it by lowering rates in-line with other mortgage products, by increasing our LTVs to a max of 55% and strengthening our reach in the broker channel through our Customer Success and EQB BDM team,” von Martels told Mortgage Broker News.
Over at HEB, where loan originations grew by 14% during the fourth quarter of 2020, regional vice president Clive Coke told MBN that demand for HomeEquity’s products was largely in line with what the company had been anticipating earlier in the year.
“We thought that COVID might have impacted us more, but it actually pushed up our business,” Coke said.
In the early days of the pandemic, a maelstrom of homeowner panic and shifting lender guidelines, the reverse mortgage space may not have been every broker’s first thought when in need of a relevant solution for her clients. Coke said HEB’s strategy was to educate its broker partners that the bank had a sound strategy for assisting borrowers while other lenders’ knuckles were turning white.
“Sometimes people think, ‘This is what’s happening in the marketplace. Lenders are going to stop lending.’ And we did see some of that,” Coke said. “But from our perspective, we were a little bit COVID-proof.”
Despite having to juggle a sudden surge in business at a time of economic chaos, von Martels said Equitable’s experience in the reverse mortgage space allowed it to serve its clients without succumbing to the kinds of capacity constraints that can leave borrowers feeling neglected and confused.
“We’re fortunate to be supporting this solution through a very mature bank with leading-edge service levels,” he said. “Our reverse mortgage credit team has grown in numbers and experience to accommodate the volume.”
Reverse risks rising?
Reverse mortgages, because of the variables involved – home prices, interest rates, life – often appear, to the uninitiated, as being riskier than the average loan product. With so much uncertainty around the future of Canadian home prices, could reverse mortgages be setting themselves up for disaster?
RateSpy founder Robert McLister doesn’t believe in such a dramatic scenario.
“As more seniors reverse mortgage, we may see an acceleration in aggregate home equity depletion, other things being equal,” he said. “But the practical impact of that depends largely on home price appreciation. Some won't be happy with their smaller inheritances, but maybe children should worry more about their parents’ happiness than their personal bank balances.”
Coke says HEB’s statistical models, which take into consideration life expectancy and home values, have proven to be robust risk mitigation tools. But he says the idea of reverse mortgages being uniquely risky is a misconception.
“Many people jump online and Google ‘reverse mortgages’ and they don’t realize that they’re on a US website,” he said, noting the significant differences in each country’s approach to power of sale and foreclosure proceedings. “When people find that it’s more risky, they don’t actually realize that they’re comparing US reverse mortgages to Canadian reverse mortgages.”
Both Coke and von Martels pointed out that their reverse mortgage clients are covered by built-in equity protections.
“The fact that there’s a No Negative Equity Guarantee does mean that the client’s downside is, in a sense, protected,” von Martels said, adding that risk is somewhat organically mitigated by today’s high home prices and low interest rates. Many of Equitable’s reverse mortgage clients, he said, use their freed equity to update and renovate their properties, driving values even higher.
“If they had the option of selling and downsizing, they’d consider it. But this is a lower cost, easier, and less disruptive alternative,” von Martels said.
The future of Canada’s reverse mortgage market
Canadians arguably know more about the risks and rewards associated with reverse mortgages than ever before. Their willingness to engage the space signals to von Martels a shift in attitude among borrowers and brokers.
“I have sensed a shift, and the growth in outstanding reverse mortgage balances would support the narrative that Canadians continue seeing value in accessing home equity via a reverse mortgage,” he said, noting that it wasn’t until recently that enough room existed in the space for a second major player.
Coke believes HEB, Canada’s longest-running reverse mortgage provider, has been instrumental in opening Canadian minds to the product’s possibilities. In addition to its ongoing efforts to educate brokers and business partners on the value and sustainability of the bank’s offerings, HEB’s recent marketing efforts – the “Doris” ad chief among them – go beyond dollars and cents and appeal, quite savvily, to homeowners’ emotions in a way that, rather than patronizing them, actually validates their dreams.
“Our marketing team is phenomenal in how they understand the psyche of our customers and what it takes to change their perceptions,” Coke said.
Because of Canada’s rapid warming to reverse mortgages, both Coke and von Martels see demand in the space continuing to intensify, even if the economy recovers and liquidity is no longer an immediate concern for the country’s retired homeowners.
“The fundamentals behind the product,” von Martels said, “are robust. Namely, record home prices, rock-bottom interest rates, and a resounding preference to remain in the home for as long as possible.”
Citing data from the Equity Release Council and Ernst & Young, von Martels said the Canadian reverse mortgage market is estimated to grow by “three to four times over the next 10 years.”
Coke is similarly optimistic about HomeEquity Bank’s fortunes in the years to come. He said that HEB’s research indicates what amounts to a 50-50 split between customers who need its product – to clear debt, to create a reserve fund – and those who want it as a means of funding their vacations, making further investments, or helping their families by choice rather than out of a sense of desperation.
“From our perspective, the need is always there. But [a reverse mortgage] is not just a product of last resort. There is a massive group of people that want to access their equity safely and securely to do the things they haven’t yet gotten to do,” Coke said, adding that a whopping 39% of Canadians fit the company’s target demographic.
“It’s almost like the stars have aligned,” he added. “It’s simply about us being there to service clients and help them know they have options.”
At Equitable, von Martels says maintaining the momentum generated in 2020 will rely on the bank reaching out to its broker partners, encouraging them to switch their clients to an Equitable reverse product, and offering them “the best service available.”
He, too, thinks reverse mortgages’ time has arrived.
“Even before COVID there was a resounding preference for aging in place as opposed to moving into some form retirement living. Something like 99% of Canadians want to age in their homes for as long as possible,” he said. “I subscribe to the belief that when COVID is behind us, there will be a surge in consumption – and that takes cash flow, some of which will be accessed via home equity.”