Q. It seems to me that you are writing a lot about reverse mortgages recently. Is the subject really worth the time you are spending on it?
A. I think so. I view the home equity conversion mortgage (HECM) program as an important, if partial, solution to a critical problem: an increasing concern among people looking ahead that their living standards won't be maintained after they stop working.
The Pew Research Center has found that between 2002 and 2011, the percent of adults who said they will not have enough money to live "comfortably" in retirement rose from 32 percent to 53 percent. Among adults in the 55 to 64 age bracket, the percent who are "not too" or "not at all" confident they will have enough to live on in retirement rose from 26 percent in 2009 to 39 percent in 2012.
This growing concern is well-founded. The Center for Retirement Research at Boston College has developed and maintains a "National Retirement Risk Index," which uses data collected by the Federal Reserve in its Survey of Consumer Finances to calculate the percent of households who "may be unable to maintain their standard of living in retirement." A better title would be "Index of Retirement Impoverishment." The index rose from 31 percent in 1983 to 44 percent in 2007 to 53 percent in 2010.
The calculation assumes that all wealth of retirees is converted into income, including their housing wealth, which is a large proportion of the total. But converting housing wealth into current income can be done only by selling the home and investing the equity, or by taking a reverse mortgage. If the data were calculated separately for retirees who remain in their home but don't take a reverse mortgage, the percent faced with retirement impoverishment would be substantially higher.
About half of the 2007-2010 decline in the risk index resulted from a drop in house values. (The other half was due to declines in interest rates and stock prices, plus a rise in the Social Security full retirement age.) The decline in house values ended last year, and at this point the prognosis is for moderate increases for at least a few years. In addition, interest rates, which were the second-most important cause of the 2007-2010 rise in the index, can't decline any further. This means that a rise in house values could generate a decline in the index over the next few years, but it won't help the senior homeowners who can't or won't convert their house value into income.
But why would a senior homeowner faced with impoverishment elect not to sell or take a reverse mortgage? They don't sell because they want to remain in their homes until they die or are forced to leave by illness. And they don't take a reverse mortgage for the very same reason. In their minds, a reverse mortgage is associated with transferring the right to live in their home to someone else. Untold millions stay put to avoid this risk.
Their concern has some substance. If they take out a reverse mortgage and then fail to pay their property taxes or keep their homeowners insurance current, they are in default and can be evicted. As far as I have been able to find out, this has yet to happen under the FHA-insured HECM program, but there is always a first time.
Furthermore, there have been evictions associated with the program. Younger spouses and boarders who are not part of the HECM contract have been evicted when the senior covered by the contract died. These cases have been much publicized, in some cases sensationalized, by media that paint a picture of government putting innocent people out on the street.
The fact that all the risks associated with a HECM reverse mortgage are entirely under the control of the senior is a subtlety that eludes many. The fear of losing one's most valuable possession does not encourage rational thought. Much of what I do with reverse mortgages is designed in one way or another to dispel this fear.
• Contact Jack Guttentag via his website at mtgprofessor.com.
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