Cognitive Aging in Seniors May Hinder Reverse Mortgage Use

As people age and their cognitive ability to make important decisions fades over time, this could have a material effect on their personal finances later in life, with implications for potential reverse mortgage utilization, according to a new report on the cognition and housing behaviors of older adults.

Such cognitive limitations may affect the ability of some older Americans to manage their financial affairs and service debt, issues particularly important for products designed to tap into the enormous housing equity held by older Americans, says a new report from the Mortgage Bankers Association’s Research Institute for Housing America (RIHA).

The report, titled “Cognition and the Housing Behavior of Older Americans,” finds a strong correlation between cognitive decline and the abilities of older adults to make decisions related to their own housing and financial situations.

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The aggregate amount of home equity secured by senior households in the U.S. totaled $5.83 trillion as of the fourth quarter of 2015, according data released this week by the National Reverse Mortgage Lenders and RiskSpan. Despite this multi-trillion-dollar wealth held by senior homeowners, reverse mortgage utilization remains low, with some studies reporting just 2% of eligible seniors actually using reverse mortgages.

As Baby Boomers begin to enter their retirement years, they are facing new challenges with significant implications for both borrowers and lenders, said the report’s author, Gary V. Engelhardt, Melvin A. Eggers Faculty Scholar at Syracuse University, and a faculty associate in the Syracuse University Aging Studies Institute.

“In particular, given the impact of aging on memory and other cognitive skills, there is a need to consider the implication for financial decisions made by older adults,” Engelhardt said in a written statement. “By the time individuals are arriving into traditional retirement ages, when many important financial decisions are made, cognitive skills are already in decline as part of normal cognitive aging.”

The MBA report provides a profile of housing, health and cognition for a nationally representative sample of adults age 65 and older, using data from the 2012 Health and Retirement Study to examine the link between cognitive status and mortgage decisions.

Among the key findings, the report found that typical declines in memory and cognition are associated with substantial increases in difficulty with managing money and an increase in mortgage delinquency, especially for older women.

The reality is that Americans are living longer today than ever before, with the average life expectancy in the U.S. being 78.8 years, according to the Center for Disease Control and Prevention. While this may be positive from the perspective of increased lifespan, this longevity is pushing many financial decisions to later ages.

As a result, many older adults are forced to make momentous life choices at a time when their mental faculties may already be in decline.

“The Baby Boomers are entering their traditional retirement years with an expectation of living longer than previous generations but also with more debt, meaning that they will have to make increasingly complex housing and financial decisions,” said Lynn Fisher, MBA’s vice president for research and economics, and executive director of RIHA, in a written statement.

In addition, Fisher notes the number of Americans over the age 60 will grow to nearly 62 million by 2024—a population swell that only adds weight to the seriousness of the challenges facing both Boomers and the mortgage industry serving them.

“This study highlights the fact that memory loss in particular raises particular challenges for the financial well-being of older Americans and suggests that we may need to reassess how the mortgage industry designs, originates and services financial products for seniors,” Fisher said.

Written by Jason Oliva