As the numbers of seniors carrying mortgage debt in retirement has increased, so too has the potential financial burden of a regular monthly mortgage payment. Increases in inflation and the cost of living can overwhelm those living on a fixed income, according to an article published this week in USA Today.
“Retirement researchers warn that mortgage debt in retirement can be a trap,” the article explained.
According to data from the Survey of Consumer Finances maintained by the Federal Reserve, the share of Americans ages 75 and older who have mortgage debt has risen from 5% in 1995 to 25% in 2022.
The amount that these same homeowners owe on their mortgages has also risen considerably, going from a median of $14,000 to $102,000 in the same period of time.
An increase in home values has generally put older homeowners on better financial footing overall, but if most of one’s net worth is tied up in the illiquid asset of home equity, then the presence of a regular mortgage payment may not make older homeowners feel like they’re better off.
A 2023 study published by the Michigan Retirement and Disability Research Center at the University of Michigan, which was cited by USA Today, found that a “typical” retiree often does not have the financial resources or assets to adequately cover their mortgage debt.
“Researchers found that retirees with larger mortgages face greater financial peril. Households with more mortgage debt tend to postpone retirement and to spend less money once retired,” the outlet said. “They also tend to sell their homes sooner than retirees with smaller mortgages or no mortgage.”
A number of reasons have been offered by experts for these changes. Homebuyers as a cohort are getting older, with 2023 data from the National Association of Realtors (NAR) showing that the typical first-time buyer last year was 35, while the average repeat buyer was 58. Baby boomers may be more comfortable taking on mortgage debt in later life when compared to their older counterparts.
As far as potential solutions go, one suggestion is the common route of downsizing — selling an existing home and using the sale proceeds to move into something smaller. But USA Today also mentions the possibility of using a reverse mortgage.
“It’s a loan that allows a homeowner to tap into equity, with the home as collateral,” the outlet said. “The loan generally becomes due when the owner dies, moves or sells.”
The research from the University of Michigan “begs the question, what about reverse mortgages, and why aren’t they a reasonable part of the solution?” J. Mark Iwry, a nonresident senior fellow at the Brookings Institution, told USA Today.
One potential answer was offered to the outlet: the persistent reputational issues the industry has had for years. USA Today also cites some of its own reporting from 2019 that took aim at certain actors in the reverse mortgage industry. It painted a bleak picture of the industry’s practices, some of which were challenged by other subject-matter authorities.
USA Today devoted some additional investigative work to the practices of the reverse mortgage industry in 2019, and it also published an op-ed on the topic written by a leader at the industry’s leading trade organization.
“’It’s a loan that allows a homeowner to tap into equity, with the home as collateral,’ the outlet said.” This is a very interesting sentence Chris cites. Why not just say that it is a mortgage specifically designed to meet the needs of older homeowners?
The article was not only written by authors who know how to say more, using fewer words but it was also reviewed by editorial staff who have honed the economy of words to an unparalleled skill. I am a CPA not a professional writer but in thirteen words, I said more than these writing professionals did in sixteen. There is a reason that they were superfluous and did not cite for whom and for what purpose these mortgages were designed. Did their research team overlook the purpose for which Congress stated it created HECMs as declared in federal law at 12 USC 1715z-20(a)? That provision states:
“The purpose of this section is to authorize the Secretary to carry out a program of mortgage insurance designed-
(1) to meet the special needs of elderly homeowners by reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income, through the insurance of home equity conversion mortgages to permit the conversion of a portion of accumulated home equity into liquid assets; and
(2) to encourage and increase the involvement of mortgagees and participants in the mortgage markets in the making and servicing of home equity conversion mortgages for elderly homeowners.”
Just the HECM portion of the industry has seen over 1.3 million mortgages originated with over 1.8 million borrowers. Of course, this does not include the once very popular Home Keepers created by Fannie Mae, the Cash Account Plans created by Lehman Brothers, and other less popular proprietary reverse mortgages created by others. While today, reverse mortgages are not nearly as popular as they were 10 to 20 years ago (mainly due to 1) questionable changes made particularly by HUD to the HECM program and 2) to somewhat higher interest rates), tens of thousands of seniors are still obtaining HECMs in particular to meet their financial needs in retirement.