Promoting awareness of how reverse mortgages help retirees achieve financial security is critical to expanding the market for Home Equity Conversion Mortgages. But accomplishing this requires several profound policy changes to strengthen programs that support reverse mortgages, according to a new report.
Facilitating the use of home equity for retirement consumption is one of the key objectives proposed in a report by the Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings.
The report, issued Thursday, outlines several recommendations to address a variety of retirement challenges facing Americans, including proposals to strengthen and modernize Social Security, preserve retirement savings for older age and improve workers’ access to workplace retirement savings plans.
Above all else, the common thread running through each of the recommendations resolves to reduce the risk of outliving one’s own savings. Fittingly, reverse mortgages and their application in retirement were a key aspect of the report.
Trillion-dollar potential
For many older Americans, home equity is their largest asset. Among families headed by someone aged 75 or older, the median financial assets stand at about $29,000, while median net worth (including home equity) is approximately $217,000, according to the BPC report.
Americans own more than $12.5 trillion in home equity, according to the Board of Governors of the Federal Reserve System. Nearly two-thirds of this wealth is held by Baby Boomers and other homeowners age 55 and older.
“It’s important to help people save their home equity,” said James B. Lockhart III, co-chairman of the Commission and vice chairman of investment advisory firm WL Ross & Co., during a presentation in Washington, D.C. Thursday morning.
During his remarks, Lockhart, who formerly served as the director of the Federal Housing Finance Agency, acknowledged that reverse mortgages, though not widely utilized among retirees today, do have the potential to become more popular as older homeowners nationwide look to tap the trillions of dollars they hold in home equity to support their retirements.
“It’s not used by many people, but I think it will be important moving forward,” he said.
Reverse mortgage education needs FHA
Although the current reverse mortgage market is small and the HECM product carries its own risks, these financial tools, which the Commission describes as “little-understood and rarely used,” can be valuable tools for some retirees who have significant home equity.
“Ultimately, many homeowners could benefit from a reverse mortgage in retirement, but have not considered the possibility or are unaware that advice is available from FHA-sponsored independent counselors,” the Commission states.
FHA-approved housing counselors help homeowners assess their resources and determine whether a HECM is appropriate for their particular situation.
In efforts to enhance counselors’ abilities to continue serving older homeowners, the Commission recommends providing additional resources to FHA to administer the HECM program. A portion of these funds would go towards enhancing the existing financial counseling program, while additional funds would help FHA increase its advertising of HECM counseling to promote awareness among retirees.
“Since the retirees who could benefit most from a reverse mortgage are unlikely to have a financial advisor, spreading the word about low- or no-cost counseling is important,” the Commission states.
The Commission also encourages that FHA engage a variety of agencies that are focused on retirement security, including the Treasury Department, the Labor Department, PBGC, the Social Security Administration, and even the Consumer Financial Protection Bureau. In doing so, they suggest, would allow FHA to develop a strategic plan for how reverse mortgages can play the most appropriate role in retirement security.
“Coordinated efforts across government agencies to strengthen the role of home equity in providing retirement security could help to increase awareness of reverse mortgages,” the Commission states. “Such coordination could also improve FHA’s existing counseling program, providing new perspectives and fresh insight.”
Low-dollar reverse mortgages
The BPC’s report arrives just a few weeks following a previous set of policy recommendations issued by the organization’s Senior Health and Housing Task Force, which pushed for the development of a low-cost reverse mortgage.
Thursday’s report reiterated and further expounded upon the details of what the Commission proposes as a “low-dollar reverse mortgage pool.”
Reverse mortgages are often criticized for their high costs, as they require an origination and monthly servicing fee, along with an initial mortgage insurance premium (MIP) that can cost up to 2.5% of the maximum claim amount, as well as an annual MIP of 1.25% of the outstanding balance.
These costs, the Commission argues, ultimately make the HECM program unsuitable for individuals who want to borrow smaller amounts from their home equity.
“We recommend offering a low-dollar reverse mortgage pool that would operate alongside the current system as a way to allow retirees to tap into smaller amounts of their home equity,” the Commission states.
For example, FHA could limit borrowing from this pool to no more than 30% of a home’s value, according to the proposal. These mortgages would operate in a separate, lower-risk pool which would remain backed by FHA.
“With tighter borrowing limits, homeowners would be less likely to take on high levels of debt, and the federal government would face less risk from a housing market downturn,” the Commission writes in its report. “This would allow FHA to charge a lower MIP—hopefully, less than 1 percent each for upfront and annual premiums.”
Compared to the current system, the Commission suggests that this version of “scaled-down” HECM might appeal to a different type of borrower—a retiree who faces a “non-recurring consumption need,” rather than someone who has long-term, serious financial issues.
“A lower-dollar pool would broaden the market for reverse mortgages, giving ‘home-rich, cash poor’ retirees the ability to tap into a smaller amount of their home value at a more affordable cost,” the Commission states.
Growing indebtedness threatens retirement security
Given the prevalence of “home-rich, cash-poor” retirees, the Commission believes that public policy, at a minimum, should not encourage working-age adults to deplete their home equity assets.
The past several decades have seen increasing indebtedness among older Americans. The median amount owed by older homeowners carrying a mortgage increased by 82% between 2001 and 2011, from around $43,000 to $79,000, in inflation-adjusted dollars, according to the CFPB’s 2014 report, Snapshot of Older Consumers and Mortgage Debt.
“One part of the crisis was people kept using their home as a piggy bank,” Lockhart said during Thursday’s presentation.
Had policies that discourage home equity depletion in pre-retirement years been in place a decade ago, the reverse mortgage industry might have escaped the effects of “ATM-like spending,” said Shelley Giordano, chair of the Funding Longevity Task Force, who attended the Commission’s meeting Thursday in Washington, D.C.
“Any policies that strengthen the prudent use of home equity, both leading up to and during retirement, would be welcomed by the reverse mortgage industry,” Giordano said.
No matter the cause, the Commission notes that growing indebtedness poses a threat to retirement security, especially for retirees who have few assets outside of their home and who might need to access their home equity for consumption purposes.
“Holding mortgage debt in retirement limits retirees’ ability to tap home equity and is just one of many considerations that Americans need to understand as they make decisions about their own savings and retirement,” the Commission states.
Read the Commission’s retirement security report here.
Written by Jason Oliva
