Reverse mortgages can potentially be powerful tools for seniors to facilitate goals related to retirement financing or aging in place, but many seniors find themselves averse to taking on additional debt late in life. This could be either because they have just spent a lot of time and money paying off an existing forward mortgage to own a home free and clear, or because they just simply don’t want to be saddled with the responsibility of satisfying debt in the later stages of life.
This could be one reason that home equity tapping generally and reverse mortgages specifically have not caught on in a widespread way with American seniors, according to Shai Akabas, director of economic policy at the Bipartisan Policy Center (BPC). In part 1 of a recent interview, Akabas discussed some of the solutions that can be found by tapping the largely untapped resource of home equity for seniors.
In this concluding portion of the interview, Akabas describes some of the hurdles that currently exist for purveyors of home equity tapping products when trying to reach senior clients.
RMD: It’s my understanding that seniors are also averse to taking on additional debt later in life. How would that kind of aversion translate into home equity lending? Has that manifested in any demonstrable way in the current landscape?
Shai Akabas: People often celebrate the day that they make the final payment on their student loans or home mortgage. Suffice it to say they’re not eager to once again feel like they are in the red. The challenge for reverse mortgages is helping people realize that they are a different kind of product, a different kind of debt.
There is research showing that households tend to hoard their resources in retirement, whether from a bequest motive, a concern that they will run out of savings, or other reasons. Part of that is not having a good idea of how long they need their retirement income to last. Annuities can be a part of the equation there, particularly QLACs, which start payments when the purchaser attains a certain age.
Notwithstanding general tendencies, perhaps a home mortgage is viewed differently, as recent generations are entering retirement with more debt than in the past. Over the past three decades, the share of households headed by someone aged 65 or older that have housing debt has doubled, from 15% to 32%. This is leading many to refinancing their mortgages instead of utilizing their home equity in retirement.
See here, or read a short blog about the research from the Boston College Center for Retirement Research.
Mortgage debt is thus a growing obstacle to older Americans’ ability to tap their home equity in retirement. The Tax Cuts and Jobs Act of 2017 eliminated the tax deduction for interest on home equity loans. This change may help, and Congress should explore other ways to reduce the use of home equity to fund pre-retirement consumption.
Speaking broadly, is there anything you think the reverse mortgage industry can do to potentially improve its ability to connect with senior homeowners based on your understanding of retirement needs and the perspectives that dictate action?
The industry should continue its work with key groups, such as AARP. The U.S. Department of Housing and Urban Development (HUD) can do more in terms of working with the private sector and educating the public around options for home equity in retirement.
Based on what you’ve seen, are the retirement policy priorities of the new administration substantively different from the priorities of the previous one?
Some things have changed, while others always seem to stay the same. In the latter category, neither administration has prioritized addressing the impending financing shortfall in Social Security, which threatens to undermine retirement security for tens of millions of Americans.
The new administration is bringing a different perspective to the fiduciary rule debate, which has been ongoing through several administrations, though it remains unclear where the rule will wind up. Additionally, the Biden administration recently pushed successfully for an expensive bailout of multiemployer pension plans.
Both Administrations and Congress have worked to promote private retirement savings in line with BPC’s Commission recommendations, many of which were embodied in the 2019 SECURE Act or are being discussed now as part of SECURE 2.0. It’s great to see bipartisanship on such an important issue for Americans’ financial security.
Is there anything I haven’t asked you about your research in the retirement space or your perspective on reverse mortgages that you think our industry audience should know about?
It’s a challenge to elevate retirement security amidst all the other issues grabbing headlines and sitting atop Congress’ agenda. Yet, there are dozens — if not hundreds — of organizations pushing for improvements to retirement and savings policy with only limited coordination among them. It’s important to acknowledge the common ground that we can leverage: Everyone wants to give more people in this country the opportunity to save and invest in their future; no one is satisfied with the status quo of elderly poverty and households depleting their savings in retirement.
Out of that reality, BPC launched the Funding Our Future initiative in 2018. Our coalition’s strength is directly tied to the bipartisan nature of this issue, allowing many voices to come together with the shared goal of making long-term financial security a reality for households across the country. Because of this broad tent, we now have more than 50 organizations involved in the effort, spanning the academic, nonprofit, trade association, and corporate sectors. Home equity in retirement is a significant piece of the decumulation puzzle, and I hope that more organizations working in that space will join us in our efforts.
On reverse mortgages in particular, there needs to be a focus on reducing the transaction costs. Research from the Boston College Center on Retirement Research and the Mercatus Center both point to those as being an impediment to broader use of home equity in retirement.
