Partners (Number 2, 2006)

Vol. 16, No. 2, 2006


Can Housing Be Green and Affordable?

Technical Education: A Remedy for Poverty?

Soaring Insurance Costs Make Housing Less Affordable

CRA Revisions: Flexibility and New Choices

Reverse Mortgages Provide Answers for Some (but Not All) Seniors

Recruiting Retirees Calls for Careful Planning

Atlanta Fed Hosts Last in Series of Asset-Building Forums

Spotlight on the District—Georgia and Eastern Tennessee



  Reverse Mortgages Provide Answers for Some (but Not All) Seniors

Much has been written about “house rich, cash poor” seniors who can now tap into the large amounts of equity in their homes.

cash register house

Reverse mortgages enable many seniors to stay in their homes with increased retirement income rather than sell them out of necessity to maintain their standard of living or pay for health care. Most of those who opt for reverse mortgages will probably use the equity for health-related expenses, home repairs or services that will allow them to live at home independently longer.

A new product on the rise
Reverse mortgages are designed to give homeowners 62 or older the option of remaining in their homes by means of a “mortgage in reverse”—essentially a loan secured by the borrower’s residence. The loan is not repaid for as long as the borrower continues to live in the same home. Instead of paying the lender, as borrowers usually do, the homeowner typically receives equity payments from the lender. The payments may be structured as a lump sum distributed at the transaction’s inception, as payments that extend for the term of the loan, or as a line of credit that may be drawn upon at the borrower’s discretion.

The reverse mortgage is repaid through the sale of the home when the homeowner moves or dies. Failure to meet contractual obligations such as maintaining the residence or paying property taxes can also end the agreement with the lender.

The number of reverse mortgages written in the United States has accelerated dramatically—from 7,781 in 2001 to 37,829 in 2004. Between 2003 and 2004 alone, the number of these loans nationwide jumped 109 percent. This huge increase has been pushed by rapidly appreciating property values and the aging of the population. The Home Equity Conversion Mortgage, a reverse mortgage product insured by the U.S. Department of Housing and Urban Development since 1989, accounts for 90 percent of the reverse mortgages written, according to the National Reverse Mortgage Lenders Association.

“Aging in place” benefits seniors and government coffers
One of the most compelling arguments for reverse mortgages from a social perspective is that the funds can be used to support long-term care at home. According to a study released by The National Council on Aging, reverse mortgages could help over 13 million Americans pay for long-term care expense at home, thus allowing them to remain independent and in their homes longer.

The study estimates that some 9.8 million elderly households (aged 62 and older) deal with an impairment that makes it hard to live at home. It indicates these households could access as much as $695 billion through reverse mortgages. These funds could go toward family caregiving and other long-term care expenses typically not covered by Medicare, Medicaid or private insurance. Access to these funds would enable many seniors to postpone relocation to an assisted care facility or avoid it altogether, allowing them to “age in place.”

“Use Your Home to Stay at Home: Expanding the Use of Reverse Mortgages to Pay for Long Term Care,” a report funded by the Centers for Medicare and Medicaid Services and the Robert Wood Johnson Foundation, shows how reverse mortgages can alleviate financial pressure not only for individuals and families, but also for state Medicaid programs and the federal government. Increasing the market for reverse mortgages could save Medicaid $3.3 billion annually by 2010.

Low-income homeowners face challenges
What are the implications of reverse mortgages for low-income and very low-income elderly households? For those with significant equity in their homes, reverse mortgages may help to ensure continued independence and quality of life. Two-thirds of households headed by individuals 75 or older are headed by single persons, and three-quarters of these are female. Many live on extremely low incomes.

If their homes have substantial equity, reverse mortgages could be the key to lifting these women out of poverty and helping them live independently. However, many low-income households are in either urban core neighborhoods or rural areas where property values have not appreciated. In some instances values have actually declined due to the condition of the property or general disinvestment in the surrounding neighborhood.

For homeowners whose property has slipped in value, strategies to continue living independently become more complex. Many could remain in their homes if they received subsidies or grants for repair and maintenance and some basic caregiving services. Home repair programs are available from local, state and federal funding sources, but the need greatly exceeds available resources. Most of these programs report a two-to-three year waiting list.

Social service organizations offer limited caregiving such as meals on wheels or personal care services, and some home maintenance services base fees on income; but again the need greatly outstrips available resources. In some instances, households without access to such services will have to leave their homes due to the physical condition of the property and a lack of funds to make repairs. They may have little choice but to move to subsidized rentals or assisted living facilities.

The risk exists that households will rely too heavily on reverse mortgages to the detriment of other asset-building strategies.

When they are feasible, reverse mortgages can also serve as a tool to combat predatory lending practices that target low-income elderly households. Unlike high-cost home equity loans, reverse mortgages protect elderly homeowners against foreclosure and other predatory practices. Reverse mortgage programs also require pre-approval counseling for potential applicants to determine if the product is appropriate for meeting their needs. Counseling, which is usually conducted by nonprofit consumer credit organizations, provides seniors with an opportunity to assess their overall financial circumstances and apply for other assistance if they need it.

Reverse mortgages could thus deter high foreclosure rates and disinvestment due to predatory practices in lower income neighborhoods. Targeting neighborhoods with these demographics for educational programs on the advantages of reverse mortgages could prove beneficial to both elderly homeowners and communities in general.

Some concerns for policymakers
Despite the advantages of reverse mortgages for elderly households, the product raises some concerns. One is its possible impact on intergenerational wealth transfer. Studies indicate that home equity accounts for about 80 percent of the nonpension wealth of older households. If a substantial amount of household equity is consumed during the homeowner’s lifetime, the potential for wealth transfer to subsequent generations will be diminished or eliminated. Because these products have only been in use for several years, this aspect of reverse mortgages has yet to be analyzed, but it could become an issue in the future.

Some financial planners suggest that potential losses to heirs can be mitigated if the homeowner uses a portion of the proceeds of the reverse mortgage to buy a life insurance policy (single cash payment) to offset the loss of equity. Anecdotally, housing counselors report that most potential heirs support the use of reverse mortgages to improve the lives of their elderly relatives. Whether widespread use of this product could actually decrease the asset value of households who normally would have received an inheritance remains to be seen.

A risk also exists that households will rely too heavily on reverse mortgages to the detriment of other asset-building strategies such as contributions to individual and employer-sponsored retirement plans. As real estate prices have escalated in many parts of the United States, homeowners have turned increasingly to the equity in their homes as a primary asset-building tool for retirement. In the event of a regional or nationwide downturn in real estate values, this approach could prove disastrous.

As the nation’s households age, the popularity of reverse mortgages seems destined to increase, and policymakers will have to consider the issues raised by these products as the market evolves. Reverse mortgages will clearly be a useful asset management tool which, when used properly, may assist elderly households in meeting daily living expenses, financing health care, and maintaining the physical condition of their homes.

However, federal, state and local policies will continue to be crucial for the quality of life of the many senior homeowners living in poverty in our urban core neighborhoods and rural areas. Without significant increases in funding for home health care and programs to rehabilitate and maintain housing, many of these seniors will be forced to give up independent living before more affluent households with access to home equity and reverse mortgage products.

This article was written by Janet Hamer, regional community development manager in the Atlanta Fed’s Jacksonville branch.