Reverse Mortgage in the U.S. And Canada: A Comparison

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From the economic system to standard of living, Canada and U.S. are parallel to each other. The two countries have a lot in common including an aging population and a mortgage product intended to cater to them.

If the U.S. has Home Equity Conversion Mortgage (HECM) for its more than 13 million 60 to 69 years old owner-occupiers, Canada has Canadian Home Income Plan (CHIP) for its around 7 million seniors.

Like HECM, CHIP dominates the reverse mortgage market in Canada. Other reverse mortgage products like Royal Trust and Home Fund have particularly limited market share.

Popularly known as CHIP, the Canadian reverse mortgage is consistently and rapidly growing, recording $239 million of reverse mortgages in 2011. In the U.S., the same growth has yet to be seen. Below are the factors that come into play setting the boundaries between the two countries.

Qualifying Age 

HECM is designed to help homeowners aged 62 years and older to tap their home equity to be a source of cash according to certain payment option while CHIP, as of June 2011, only requires a senior-borrower to be 55 years old to qualify for the loan. This means that CHIP can originate far more loans this year and the coming years.

In Canada, the lowering of eligibility age for senior-borrower from 60 to 55 is welcomed positively. The move is justified by the significant demand from couples with considerable age gap. Say, one of the couples who are legal owners of a property being subject to reverse mortgage is 67 and the other is 55. In Canada and the U.S., the youngest of the borrowers determine the qualifying age of the rest. In this scenario, this couple will be denied a reverse mortgage loan with qualifying age of 60, more, 62.

The irony of it is that HECM has an even older qualifying age, and yet, according to Consumer Financial Protection Bureau (CFPB), it's a serious consumer concern that needs some action.

In a report, CFPB heralded a key finding that nearly half of reverse mortgage borrowers in 2011 were under the age of 70. For the bureau, this finding deserves prominence because of this rationale: "taking out a reverse mortgage early in retirement, or even before reaching retirement, increases risk to consumers. By tapping their home equity early, these borrowers may find themselves without the financial resources to finance a future move - whether due to health or other reasons." So far, Canada is handling its 55 years qualifying age well while the U.S. is uneasy with its 62 years and labels it as a risk-causing qualifier.

Government Involvement 
Offered by HomeEquity Bank, CHIP loans are introduced in 1986 to provide Canadian seniors with the opportunity to unlock the equity invested in their homes. CHIP, though operated by a private entity, is considered a main Canadian reverse mortgage program. CHIP can be loaned either directly from HomeEquity or through most of Canada's chartered banks, credit unions, mortgage brokers, investment and financial planning firms, and other financial institutions.

HECM, as we all know it, is introduced by the Housing and Urban Development Department (HUD) in 1989. Today, it is a Federal Housing Authority (FHA)-insured program originated by FHA-approved lenders. Furthermore, terms of HECM loans like mandatory counseling and prohibition of cross-selling are specified by HUD.

Aside from the government interventions on the federal level, HECM is also regulated on the state levels. States like California, Massachusetts, Illinois, and Minnesota have been on the move trying to pass more regulations for reverse mortgage. In spite of all these, the CFPB report found that policies currently available are not enough to help American seniors understand the intricacies of reverse mortgage and eventually make reasonable tradeoffs and decisions.

This is to say that reverse mortgage industry in the U.S. has a significant government intervention and is poised to go for more while its counterpart in Canada is enjoying a relatively higher economic freedom and is faring well.

Generalization
Canada's reverse mortgage industry experience can be replicated in the U.S. and become another case of parallel development between the two countries. This is only if, the U.S. government sees it as a valuable retirement planing tool, not a growing monster needing a bigger jail year after year while all industry players make a commitment to step-up ethical practices both in lending and reverse mortgage lead generation.

 

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