Home equity comprises a significant portion of an older adult’s net worth and can be a valuable source of cash flow during retirement. But while reverse mortgages provide homeowners with a spigot to tap an otherwise illiquid asset, for some policy experts, the existing product may not be enough to adequately serve the long-term care financing needs of middle-income Americans.
Housing wealth is particularly important for middle-income Americans, as more than half of adults over age 55 without retirement savings are homeowners and homeownership rates are high among those age 65 and older, according to the Long-Term Care Financing Collaborative, a nonprofit organization focused on improving the way Americans pay and prepare for non-medical care.
The central goal of the Collaborative is to develop pragmatic recommendations that create an affordable and sustainable, public and private insurance-based financing system that enables people of all incomes to receive high quality long-term services and supports.
Members of the nonprofit organization include individuals from influential policy think-tanks such as The Brookings Institution, Urban Institute and The Pew Charitable Trust, among others focused on senior care and the well-being of older Americans.
Today, the Collaborative estimates more than 6 million older adults need high levels of care, with this number expected to increase to nearly 16 million within a half-century.
“Millions of middle-income Americans drain their financial resources, place enormous burdens on family caregivers, and eventually turn to Medicaid for assistance,” the Collaborative said in its final recommendation report issued this week. “We believe the United States can do far better.”
And that includes reverse mortgages.
Home equity can be a valuable source for those needing to finance long-term services and supports (LTSS) such as in-home care, community-based care in senior living facilities, transportation services, adult day centers and more.
“While homeowners say they are reluctant to use home equity for LTSS care, the reality is that many of those who need assistance in old age sell their homes, take out home equity loans, or turn to reverse mortgages,” the Collaborative stated in its February report.
Seniors who opt for institutional and community-based care settings such as skilled nursing facilities or assisted living, often spend down all of their assets, including home equity, during their length of stay.
As a result, the Collaborative believes that policymakers should explore more efficient uses of home equity to support long-term services and supports.
Although the nonprofit doesn’t take a position on any specific approach to tapping home equity, it presses policymakers to consider several options, including less expensive reverse mortgages, “perhaps through public subsidies, to allow homeowners needing LTSS to tap their assets.”
The Collaborative also suggests policymakers consider deferred payment loans from public agencies, such as those used in England, Ireland and New Zealand, which allow those needing LTSS to receive services in exchange for an “explicit lien” against their home equity.
Reverse mortgages are often criticized in the media for their perceived high costs—an issue that almost never fails to find itself grouped into the “cons” category when reports weigh the potential advantages against the disadvantages of these commonly misunderstood loan products.
The two recommendations offered by the Collaborative are the only talking points issued on the topic of reverse mortgages and home equity.
Without empirical data on reverse mortgages, particularly related to their costs and how a reduction could benefit more seniors or even possibly attract more prospective borrowers, the proposals set forth by the Collaborative—of which there are no members directly participating in the reverse mortgage industry—it is difficult to consider these recommendations as anything beyond wishful thinking.
View the Long-Term Care Financing Collaborative’s final report.
Written by Jason Oliva