Reverse mortgages can potentially be powerful tools for seniors to help with goals related to funding retirement or aging in place, but many seniors are reluctant to take on additional debt later in life. This can either be because they have just spent a lot of time and money paying off an existing term mortgage to own a free and clear home, or they just don’t want to be burdened with the responsibility of paying back. a debt later. stages of life.
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 into the largely untapped resource of home equity for seniors.
In this final part of the interview, Akabas describes some of the hurdles that currently exist for providers of real estate capitalization products when trying to reach older customers.
RMD: I understand that older people are also reluctant to take on more debt later in life. How would that kind of aversion translate to home loans? Has this manifested itself demonstrably in the current landscape?
Shai Akabas: People often celebrate the day they make the final payment on their student loan or home loan. Suffice it to say, they’re not looking forward to feeling like they’re in the red again. The challenge with reverse mortgages is to help people realize that it’s a different kind of product, a different kind of debt.
Research shows that households tend to hoard their resources in retirement, whether through bequests, fear of running out of savings, or for other reasons. Part of the reason is that they don’t have a good idea of how long they need their retirement income. Annuities can be part of the equation there, especially QLACs, which begin payments when the buyer reaches a certain age.
General trends notwithstanding, perhaps a residential mortgage is viewed differently, as recent generations are retiring with more debt than in the past. Over the past three decades, the share of households headed by someone aged 65 or over who have housing debt has doubled, from 15% to 32%. This leads many people to refinance their mortgage instead of using their home equity in retirement.
Mortgage debt is therefore a growing barrier to the ability of older Americans to tap into their home equity in retirement. The Tax Cuts and Jobs Act 2017 removed the tax deduction for interest on home loans. This change can help, and Congress should explore other ways to reduce the use of home equity to fund pre-retirement consumption.
Generally speaking, is there anything you think the reverse mortgage industry can do to potentially improve its ability to connect with older homeowners based on your understanding of retirement needs and perspectives that dictate 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 in terms of working with the private sector and educating the public about home equity options in retirement.
From what you have seen, are the pension policy priorities of the new administration substantially different from the priorities of the previous one?
Some things have changed, while others still seem to stay the same. In the latter category, neither administration has prioritized solving the looming Social Security funding shortfall, which threatens to undermine the retirement security of tens of millions of Americans.
The new administration brings a different perspective to the fiduciary rule debate, which is ongoing in several jurisdictions, though it is unclear where the rule will end. Additionally, the Biden administration recently successfully lobbied for a costly bailout of multi-employer pension plans.
Administrations and Congress have worked to promote private retirement savings in accordance with the recommendations of the BPC Commission, many of which were incorporated into the SECURE Act of 2019 or are under discussion as part of SECURE 2.0. It’s great to see bipartisanship on an issue so important to Americans’ financial security.
Is there anything I haven’t asked you about your retirement research or your views on reverse mortgages that you think our industry audience should know about?
It’s a challenge to elevate retirement security amid all the other headline-grabbing issues that sit at the top of the congressional agenda. Yet dozens, if not hundreds, of organizations are pushing for improved retirement and savings policies with limited coordination among them. It is important to recognize the common ground that we can tap into: 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 poverty for the elderly and for households that are depleting their savings in retirement.
Based on this reality, BPC launched the Financing Our Future initiative in 2018. The strength of our coalition is directly linked to the bipartisan nature of this issue, enabling many voices to unite in the common goal of making long-term financial security a reality for households. Across the country. Because of this broad tent, we now have over 50 organizations involved in the effort, spanning the academic, non-profit, trade association and corporate sectors. Home equity in retirement is an important piece of the decumulation puzzle, and I hope more organizations working in this area will join our efforts.
When it comes to reverse mortgages in particular, the focus should be on reducing transaction costs. Research from the Boston College Center on Retirement Research and the Mercatus Center indicates that these factors are a barrier to the broader use of home equity in retirement.