An opponent of reverse mortgage products recently wrote two columns at Forbes discussing reasons that the business should be avoided, and that potential borrowers searching for ways to fund their retirements would be better served by exploring other financial options.
RMD reached out to Professor Teresa Ghilarducci from The New School’s department of economics to expand on the points she made in a January Forbes article saying that reverse mortgages are “a bust” because a senior’s average home equity is $80,000.
John Lunde, president of Reverse Market Insight, was also enlisted by RMD to respond to some of the professor’s expressed points, and the following idea exchange was constructed based on both of their separate responses.
1. Narrower oversight will be bad for reverse mortgages
Among the first points the professor makes in her article, she says that if the Consumer Financial Protection Bureau were allowed to observe its primary function in the wake of political shifts at the agency, that it “would investigate consumer complaints about reverse mortgages and conduct studies about how well reverse mortgages are serving consumers.”
“She implies that this would come out as negative for reverse mortgages,” said John Lunde. “But that’s not founded on any substance from what I can tell in her article. It’s just her opinion.”
“If more research was done on the reverse mortgage, the CFPB would find that the product is more likely to be appropriate for highly educated people with enough liquidity to maintain their homes and all the attendant costs,” Ghilarducci told RMD in an email when asked to expand on her point. “It also may not be a good strategy for them, because even though people in their 60s and 70s want to age in place, aging in place is often a bad place for people to age. The suburbs are lousy with isolated old women.”
This point was also reiterated in Ghilarducci’s February Forbes column.
2. Seniors are financially ill-equipped for a reverse mortgage
Ghilarducci also says in her initial Forbes piece that, according to the Boston College Center for Retirement Research, over 50 percent of seniors do not have enough financial assets to combine with Social Security benefits to maintain their standards of living.
“I don’t disagree with this but see it primarily as a spending problem,” said Lunde. “Most households simply spend too much of their income while working to save sufficient financial assets to maintain their standard of living in retirement. That both increases the spending level required to ‘maintain’ themselves according to this definition and also decreases financial assets, so it’s a ‘double whammy’ for this problem as defined.”
Ghilarducci is not convinced that this extends from a spending problem.
“There is very little evidence that people who end up [poor] in retirement were those who over-spent their income,” she said. “Those who end up in retirement without enough money had low income jobs, [and] often worked for employers that did not have a pension plan at work. Or, [they] had a number of setbacks including a health issue. They are not coming into retirement with more debt.”
3. Low average home equity doesn’t justify taking a reverse mortgage
One of Ghilarducci’s driving points in her January Forbes piece is that reverse mortgages are unable to prevent a retirement crisis, because the average amount of home equity that seniors have is less than $80,000, a figure gleaned from a 2014 survey of income and program participation conducted by the U.S. Census Bureau.
“That would seem at odds with other census figures that have consistently shown more than half of 65-plus homeowner households with no mortgage at all,” said Lunde. “It makes sense to include these lower-aged households in thinking about retirement solutions for everyone that will need one, but it seems a poor match for thinking about reverse mortgages when the vast majority of these households aren’t age-eligible. To the extent that any non-homeowner households are included in the sample it would further debunk the comparison.”
Ghilarducci told RMD that the cited number is flawed, but maintains that her point is still valid.
“I have to correct that [figure] in my blog,” she said. “For people who have a home, the average equity is a lot larger, $150,000. But since many people don’t have a home, I included people without one and the average home equity for that group is less than $80,000.”
4. If the product can’t save everyone, its usefulness is limited
The market for potential reverse mortgage borrowers, Ghilarducci related to RMD, is limited to, “high income, highly educated people in stable neighborhoods with appreciating homes, because those are the groups that are going to find the product attractive.”
When RMD asked if she viewed this as a flaw of the product’s design by not having a bigger proverbial “umbrella,” she emphasized the amorality of market economics.
“A product is designed to make the most money for the provider of the product,” she said. “If the market is not a mass market, then the price will be adjusted accordingly. It’s not up to private companies to serve social needs.”
Lunde argues that the target market of homeowners observing appreciating values is an intent of the reverse mortgage product’s design.
“Reverse mortgages are only available for a subset of the households retiring right now, and an even smaller share of the households in [Ghilarducci’s] sample,” he said. “I don’t know anyone that would argue they’re the right solution for every household.”
Lunde also added that retirement feasibility is a much larger problem for the United States to try and solve, which makes any one product unlikely to be a definitive solution.
“But, I do think reverse mortgages can play a large role for 10 million homeowner households, and think the industry should focus on that,” he said. “Spending shouldn’t be the goal, and to define it that way makes solutions that much harder to achieve.”