Reverse mortgages can potentially be a powerful tool for seniors to meet retirement finance or aging goals in place, but many seniors are reluctant to take on extra debt at the end of life. This could be either because they just spent a lot of time and money paying off their existing forward mortgage in order to get a free and clean home, or because they simply don’t want to be held responsible for paying off debt in future stages of life. …
According to Shai Akabas, director of economic policy at the Bipartisan Policy Center (BPC), this may be one reason why home equity use in general and reverse mortgages in particular has not been widely adopted among American seniors. IN part 1 In a recent interview, Akabas discussed some of the solutions that can be found by tapping into the largely untapped resource of home capital for the elderly.
In this concluding section of the interview, Akabas outlines some of the barriers that currently exist for suppliers of home equity products in trying to attract the attention of older customers.
RMD: As far as I understand, older people are also reluctant to take on additional debt later in life. How does such disgust evolve into real estate lending? Has this manifested itself in any obvious way under the current conditions?
Shai Akabas: People often celebrate the day they make the final payment on a student loan or home mortgage. Suffice it to say that they are not eager to feel like a loser again. The purpose of reverse mortgages is to help people realize that they are a different product, a different type of debt.
There are studies showing that households tend to accumulate their resources upon retirement, whether by will, because of fears that they will run out of savings, or for other reasons. This is in part because they have little idea of how long they need retirement income. Annuities can be part of the equation, especially QLACs that start paying out when a customer reaches a certain age.
Despite general trends, perhaps residential mortgages are viewed differently, as recent generations are retiring with more debt than in the past. Over the past three decades, the proportion of households headed by people aged 65 and over with housing arrears has doubled, from 15% to 32%. This is forcing many to refinance their mortgages instead of using their own equity when they retire.
Thus, mortgage debt is becoming an increasingly significant obstacle for older Americans to use their home equity after retirement. The Tax Cuts and Employment Act of 2017 abolished the tax deduction for interest on mortgaged loans. This change could help, and Congress should explore other ways to reduce the use of home equity to finance pre-retirement consumption.
Generally speaking, is there anything you think the reverse mortgage industry can do to potentially improve its ability to interact with older homeowners based on your understanding of retirement needs and the outlook that dictates action?
The industry should continue to work with key groups such as AARP. The US Department of Housing and Urban Development (HUD) can do more to work with the private sector and educate the public about home equity options at retirement.
Judging by what you saw, are the priorities of the new administration’s pension policy significantly different from those of the previous one?
Some things have changed, while others seem to always remain the same. In the latter category, no administration is prioritizing addressing the looming Social Security funding gap that threatens to undermine retirement benefits for tens of millions of Americans.
The new administration offers a different perspective on the multi-administration debate over fiduciary rules, although it remains unclear where the rule will end. In addition, the Biden administration recently secured costly retirement bailouts for multiple employers.
Both the administration and Congress have worked to promote private retirement savings in line with the recommendations of the BPC Commission, many of which have been embodied in the SECURE Act 2019 or are currently being discussed as part of SECURE 2.0. It’s nice to see bipartisanship on such an important issue for American financial security.
Is there something I didn’t ask you about your research on the retirement space or your take on reverse mortgages that you think our industry audience should be aware of?
Raising retirement benefits amid all the other headline-grabbing and congressional agenda issues is a daunting task. However, there are dozens – if not hundreds – of organizations pushing for better pension and savings policies, with only limited coordination between them. It is important to recognize a common framework that we can use: everyone wants to empower more people in this country to save and invest in their future; no one is satisfied with the status quo of the elderly poor and families depleting their savings upon retirement.
With this reality in mind, BPC launched the Financing Our Future initiative in 2018. The strength of our coalition is directly related to the bipartisan nature of this issue, allowing many voices to unite with a common goal of making long-term financial security a reality for households. across the country. Thanks to this wide range of topics, we now have more than 50 organizations from the academic, non-profit, trade and corporate sectors participating in our work. Equity at retirement is an important piece of the decumulation puzzle, and I hope more organizations working in this area will join us in our efforts.
Particularly with regard to reverse mortgages, the focus needs to be on lowering transaction costs. Research by the Boston College Center for Retirement Research and the Merkatus Center indicate that they are a barrier to wider use of home equity at retirement.