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Reverse Mortgage Pioneer Talks Past, Present, Future of Equity Conversion

Yung-Ping Chen, or Bing as he is known to family and friends, is considered by many to be the pioneer of today’s reverse mortgage. The gerontologist and economist began publicly speaking about his idea of home equity conversion in the 1960s at numerous economic and gerontological conferences, and in 1969 he presented the idea before Congress — setting into motion a two-decade pursuit to create a program that would help the country’s growing aging demographic use the equity in their homes to support their retirement years.

A devoted academic, Chen studied economics and international law before launching a teaching career that would span 50 years at institutions like UCLA and the University of Massachusetts, Boston.

His research includes insights into special tax treatments for the aging, home equity conversion, financing and benefit structure of Social Security, funding for long-term care, coverage gaps in private pensions for minority workers, and flexible work options for all workers. He has served in advisory and consultative capacities for the National Council on the Aging, the United Nations Non-Governmental Organizations Committee on Aging in New York, the Advisory Council on Social Security, White House Conference on Social Security, and various White House Conferences on Aging.

While Chen’s idea of translating the abstract notion of home equity conversion into a practical financial instrument planted the early seeds for today’s reverse mortgage, his role in all of this, he strongly insists, is limited to this idea and does not involve specific product designs.

Now retired, Chen lives in Seattle with his wife of 58 years, with whom he has raised three children. He sat down with RMD to talk about his early research on home equity conversion and what he thinks must be done to address the needs of our aging population.

What inspired you to develop a concept of home equity conversion, which you came to call the “actuarial mortgage plan?”

While working on income and wealth distributions among older adults, in a study of income and property taxation as they affected older persons, I became intrigued by the “income poor but house rich” phenomenon in the context of elder poverty. Incidence of poverty would be lower if poverty were measured using net worth rather than current money income alone. For poverty measurement based on net worth to make practical sense, however, non-liquid assets such as a home must be sold. But older homeowners were typically reluctant to sell their homes. It was the attempt to resolve this dilemma that I hit upon the idea of a voluntary conversion of net equity into an income stream or spendable cash, while assuring lifetime occupancy in the home.

Therefore, home equity conversion as an idea came from the concept of measuring the command of one’s financial resources based on the “net worth concept.” In economic terms, home equity conversion would simply be another form of dis-saving — reverse of savings. When a young person builds up home equity, he or she mortgages their future income to acquire an asset; when an old person converts the home equity into cash, he or she mortgages their asset to acquire a supplemental income. From the standpoint of earning and spending over one’s economic life cycle, saving while young followed by dis-saving when retired seems perfectly logical and sensible.

The longer story of how the concept of home equity conversion came to me should start with the policy implications of measuring a person’s command of financial resources by current money income alone. In the early 1960s, there were a number of federal and state tax laws exempting older taxpayers from income taxes or property taxes to different degrees. In a series of journal articles, I raised concerns over the issue of equity between taxpayers above and below the age for tax exemption, usually 65. One glaring issue is equity between younger and older taxpayers: Unless a governmental unit reduces its public spending by the amount of revenue loss resulting from exempting taxpayers aged 65 or older, then the lost revenue must be covered by higher taxes imposed on taxpayers under age 65.

The irony is this: It turned out that the taxpaying ability of older persons was greater than that of younger persons if ability was measured by net worth instead of current money income alone.

During your research, you uncovered similar examples of “housing annuities” that had been used around the world. Did this discovery further your belief in the value of equity conversion?

Yes. It was in 1969 when I was preparing to apply for a research grant from HUD that I came across a newspaper story about a version of home equity conversion that had already been in use in France for decades.

In France, as the story went, the owner of a house or other real estate could sell the property for a lifetime annuity (called a viager) with the purchaser taking possession of it upon the seller’s death. Viager would be a transaction between individuals, typically with the assistance of a lawyer. Then, while doing survey research about people’s opinions on home equity conversion with a grant from HUD, I came across information from a survey responder that some years ago, a Polish peasant could receive a pension from the government for a lien on his house. He could live in his house throughout his lifetime, and the government would take possession of the house on his death.

Finally, I heard that in 1961 Nelson Haynes of Deering Savings and Loan Association in Portland, Maine, made a loan to Nellie Young, the widow of his high school football coach, so she could continue to live in her house, on the condition that the house would not be part of the estate upon her death. It amounted to a reverse mortgage.

All the above examples were bilateral arrangements in “personal markets,” involving transactions between individuals or between an individual with the government. What I envisioned, however, was the creation of an “impersonal market” for a new type of mortgage product involving both the private and public sectors. This product would entail the joint operation of several financial intermediaries, such as banks or savings and loan associations, mortgage companies, private and public pension funds, and possibly also home improvement companies, with the support of the government.

Let me add that I was never interested in what I called “personal markets” for converting home equity. There were calls from attorneys and Realtors in the late ’60s and early ’70s asking me to be their consultant for this type of thing. I politely declined.

Are there other issues you would like to see addressed to help the country’s aging demographic find economic security?  

I am glad you raise the issue of economic security. Of particular importance for older people now is how significant expenditures for health care, especially long-term care, will be met.

A new phenomenon in population aging in the 21st century is lengthening life expectancy — the “aging of the old,” if you will. A dramatic increase in the number of the oldest old is expected by mid-century. The need for long-term care will become more acute from 2050, when the surviving baby boomers will all become 85 or older, with, on average, a higher probability of ill health and frailty.

The reverse mortgage has a particular contribution to make in this regard. Rather than using proceeds of reverse mortgage to pay for long-term care costs, I have suggested using reverse mortgage proceeds to pay for the premiums of a private long-term care insurance policy, and then the insurance policy can pay for the costs of long-term care when needed.

Speaking more broadly, the challenge of policy development to ensure greater old-age economic security lies, in my view, with finding approaches that balance individual and collective responsibilities. Individual responsibility is understood to be what may realistically be expected of individuals, their families and friends. Collective responsibility is demonstrated by the array of public-sector policies (i.e., federal, state, and local governments) and private-sector policies (i.e., business, labor, and nonprofits). To embark on the task of reviewing and modernizing public and private retirement policies for the future, I believe that the needs of the old in America should be met on a four-level approach, expanding from the three-level approach of the last century.

With healthcare assumed, the four-level approach would consist of 1) public assistance; 2) social insurance; 3) private mechanisms for savings, investment, private insurance, and annuities, including home equity; and 4) flexible work options. These topics will be explained in a small book I am writing with the working title “The Future of Aging: From Prenatal to the Grave.”

In short, the world is what we collectively make of it. To ensure old-age economic security, we need to balance individual and collective responsibilities, as we marshal our resources, private and public. It takes a village, as the saying goes.

Written by Jessica Guerin