An increasing amount of baby boomers and those 65 and older are carrying mortgages into retirement, pointing to a looming seniors housing crisis, according to a new report released Tuesday by the Harvard Joint Center for Housing Studies and the AARP Foundation.
“We have a big problem,” said Henry Cisneros, executive chairman at CityView and former Secretary of the Department of Housing and Urban Development, during a presentation of the study’s findings. “Many aging Americans don’t have personal savings, and governmental budgets are strapped.”
Study: Reverse Mortgages Can Help
But, reverse mortgages can offer financial security for those whom are eligible, the study says.
“Reverse mortgages can be particularly helpful to lower-income households holding most of their wealth in home equity,” the study says, adding that income from reverse mortgages can support a variety of financial needs. “The federal role in insuring these mortgages has been of critical importance in supporting continued availability.”
The number of Home Equity Conversion Mortgage (HECM) originations peaked at 114,600 in 2009, dropped sharply after the housing bust, and rebounded modestly to about 55,000 in 2012, data show.
In addition, the ability to choose either a lump sum or a line of credit can assist homeowners in paying for one-time, big-ticket expenses such as home modifications or improvements.
However, some borrowers can find themselves in a precarious financial position if they lack sufficient income to meet ongoing housing expenses, including insurance, property taxes and other fees.
“Recent studies have shown that HECM borrowers have increasingly used lump-sum payments from reverse mortgages to pay off other debts, including existing mortgages — thus exhausting their equity all at once,” the report says.
Improvements to the program address most concerns, such as limits on the amount of drawdowns in the first year and mandatory counseling to ensure older adults understand the HECM product, the report notes.
Baby Boomers Carry Most Mortgage Debt
Baby boomers were among the hardest hit in the Great Recession, with those 50 to 64 years old losing nearly a third, or 32%, of net wealth during that time, data show.
In fact, more than 70% of homeowners aged 50 to 64 were still paying off mortgages in 2010.
At the same time, the average loan-to-value (LTV) ratio spiked to 56% amid plunging house values following the recession, data show.
People who have a mortgage later in life are more likely to face housing cost burdens, said Chris Herbert, acting managing director with the Harvard Joint Center for Housing Studies, noting the importance of managing mortgage debt while working.
While home ownership significantly decreases housing cost burden, it is less likely to be realized among the 50 to 64 age group, many of whom were hit hardest by the recession, he said.
“[Home ownership] is not likely to be realized before they go into retirement,” Herbert said.
The amount of households 65 and older carrying mortgage debt into their retirement years compared to more than 10 years ago has also increased, data show.
In 1992, 19% of households 65 and older carried mortgage debt into retirement, compared to 40% of households in the same age group in 2010. The average LTV ratio in 2010 hit 45%.
“Moving forward, it’s not a pretty picture,” Herbert said.
Read the full report here.
Written by Cassandra Dowell