STUDY       Tapping   Home Equity      in    RetirementThe MetLife Study on the Changing Role of Home Equityand Reverse Mo...
The MetLife Mature Market Institute®Established in 1997, the Mature Market Institute (MMI) is MetLife’s research organizat...
Table of ContentsExecutive Summary...........................................................................................
Executive SummaryMaintaining financial security as an older adult     study approaches the issue from a consumerin America...
The findings of this study suggest that home        ›  Offer solutions that strengthen financial                          ...
IntroductionThis study examines different options for using      The concerns of homeowners in or nearinghome equity to co...
home equity effectively to manage retirement       old with dignity and security. An importantrisks. To provide a more com...
Home Equity as a ResourceAs a starting point for examining home equity       where houses appreciated dramatically,as a re...
Among today’s older adults, the decision to         the rapidly growing interest in and knowledgeliquidate home equity is ...
Home Equity as a Resource     $40,000 and homes worth less than $250,000,                  not have a mortgage. Encouragin...
homeowner households in this group are                   Unlike a home-equity loan or traditionalmarried (64.9%) and one-q...
Strategy #1—Increase Income SecurityThe foundation for retirement security has                             Sustain Cash Fl...
Table 2:  inancial Challenges of Homeowner Households Age 62 and Older,               F               by Wealth Status    ...
Strategy #1—Increase Income SecurityIncrease Annuitized Income                                 could continue working. How...
›  If she switched to part-time work at age 62,                                                    payments. Longevity ann...
Strategy #1—Increase Income SecurityThere is less consensus about the value of          older adults today already have a ...
Strategy #2—Enhance Financial ResilienceRetirement has always been a time of financial      Those who see home equity as a...
Strategy #2—Enhance Financial Resilienceborrowers take out this loan due to concerns               retirement years may al...
Figure 5:  ising Home Values, by Age               R                Thousands of                 2007 dollars             ...
Strategy #2—Enhance Financial ResilienceIssues and Challenges                               Homeowners who are looking for...
Strategy #3—Improve Debt ManagementA common characteristic of today’s older                  money, and stay out of debt.”...
Strategy #3—Improve Debt Managementhad a balance of $800 on average.33 The             their credit cards. This can be dif...
Table 3:  ype of Home Loans Used by Homeowner Households, Age 62               T               and Older with Housing Debt...
Strategy #3—Improve Debt Managementconsidering the potential impact of these loans        little or no home equity left af...
ImplicationsThe proportion of older homeowners who usehome equity as a retirement resource is stillsmall. As a consequence...
Implicationsas more than just a last resort. In this changing   ›  Address changes over the life course—                  ...
help older homeowners combine home equity               When they face a financial shortfall today,with assistance from pu...
Endnotes 	 1	 Ernst  Young (2007). The New Frontier of                	 11	                                               ...
tapping-home-equity-retirement
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tapping-home-equity-retirement

  1. 1. STUDY Tapping Home Equity in RetirementThe MetLife Study on the Changing Role of Home Equityand Reverse MortgagesJUNE 2009
  2. 2. The MetLife Mature Market Institute®Established in 1997, the Mature Market Institute (MMI) is MetLife’s research organization anda recognized thought leader on the multi-dimensional and multi-generational issues of aging andlongevity. MMI’s groundbreaking research, gerontology expertise, national partnerships, andeducational materials work to expand the knowledge and choices for those in, approaching,or caring for those in the mature market.MMI supports MetLife’s long-standing commitment to identifying emerging issues and innovativesolutions for the challenges of life. MetLife, a subsidiary of MetLife, Inc. (NYSE: MET), is a leadingprovider of insurance and financial services to individual and institutional customers.MetLife Bank is a provider of forward and reverse mortgages.For more information about the MetLife Mature Market Institute, please visit:www.MatureMarketInstitute.com.Contact:MetLife Mature Market Institute57 Greens Farms RoadWestport, CT 06880(203) 221-6580 • Fax (203) 454-5339MatureMarketInstitute@MetLife.comNational Council on AgingThe National Council on Aging (NCOA) is a nonprofit service and advocacy organizationheadquartered in Washington, DC. NCOA is a national voice for older Americans—especiallythose who are vulnerable and disadvantaged—and the community organizations that serve them.It brings together nonprofit organizations, businesses, and government to develop creative solutionsthat improve the lives of all older adults. NCOA works with thousands of organizations acrossthe country to help older adults find jobs and benefits, improve their health, live independently,and remain active in their communities.Contact:National Council on Aging1901 L Street, SW, Fourth FloorWashington, DC 20036(202) 479-1200www.ncoa.orgResearch for this study was conducted by Barbara R. Stucki, Ph.D., Director of theReverse Mortgage Initiative for NCOA.© 2009 MetLife
  3. 3. Table of ContentsExecutive Summary............................................................................................................................... 4Introduction.............................................................................................................................................. 6Home Equity as a Resource................................................................................................................. 8 › How Much Equity Is Left?............................................................................................................... 8 › Diverse Needs.................................................................................................................................... 9 › Issues and Challenges.................................................................................................................... 11Strategy #1—Increase Income Security ....................................................................................... 12 › Sustain Cash Flow.......................................................................................................................... 12 › Increase Annuitized Income ....................................................................................................... 14 › Issues and Challenges.................................................................................................................... 15Strategy #2—Enhance Financial Resilience................................................................................ 17 › Self-Insurance................................................................................................................................. 17 › Financial Buffer.............................................................................................................................. 19 › Issues and Challenges.................................................................................................................... 20Strategy #3—Improve Debt Management................................................................................... 21 › Transfer Debt.................................................................................................................................. 21 › Defer Mortgage Payments............................................................................................................ 22 › Issues and Challenges.................................................................................................................... 23Implications............................................................................................................................................ 25 › Need for Financial Flexibility....................................................................................................... 25 › Guiding Principles......................................................................................................................... 26 › Partnering to Promote Innovation.............................................................................................. 26Endnotes.................................................................................................................................................. 28 TAPPING HOME EQUITY IN RETIREMENT 3
  4. 4. Executive SummaryMaintaining financial security as an older adult study approaches the issue from a consumerin America has always been difficult and a perspective, since older Americans whosechallenge. Today’s issues of living longer, rising incomes are under duress are on the frontcosts, fewer defined benefit pension programs, line of change. The analysis reviews nationaland diminished investment values have put demographic data to provide a snapshot ofextraordinary pressure on finding new sources how households age 62 and older use this assetof income and creative ways to stretch out to cope with financial shortfalls. It examinesaccumulated savings. To supplement their recent surveys of the changing attitudes of olderbudgets, older homeowners are starting to adults and Baby Boomers to provide a glimpsetap their housing wealth by taking out home- into the problems which may lie ahead and theequity loans or reverse mortgages. But with need for new solutions. The study also includeslittle guidance, they are often unsure about existing economic and housing research thathow to use this asset as an integral part of their evaluates the capacity of housing wealth tofinancial strategy, rather than as a last-resort sustain consumption in retirement.financial resource. Older adults with lower tomoderate incomes face the biggest challenges, The aim of this effort is to encourage thesince the bulk of their non-pension wealth is development of a more robust and holisticusually tied up in their homes. approach to managing financial risk in retirement through the use of home equity.The purpose of this study is to examine It reflects a growing awareness that narrowdifferent options for using home equity to visions and simple strategies will not berespond to these new retirement realities. The enough to allow Americans to grow old with dignity and security. The diverse data presented here also offers a foundation to begin discussion about new ways to view reverse mortgages as part of a financial strategy to increase income security, enhance financial resilience, and improve debt management. The research indicates that a small but growing number of older people use housing wealth earlier in retirement to maintain financial independence, rather than saving this asset as a last resort. Some are beginning to tap this asset to ensure that they will have enough income to meet basic expenses. With limited savings, other older homeowners are using a portion of their home equity as a financial buffer to cope with unexpected health and household expenses. For many older adults, these decisions are driven by growing consumer debt.4
  5. 5. The findings of this study suggest that home ›  Offer solutions that strengthen financial equity will not offer a simple solution to the security—A house is more than a financialgrowing financial problems of aging Americans. asset; it is also a home. Older homeownersThe choices that these older homeowners make, across the economic spectrum are looking forand the problems they face, also highlight the cost-effective options that give them peacedifficulty of shifting from a financial planning of mind through additional sources ofstrategy that aims to preserve housing wealth retirement income.to one that uses this asset as a retirementresource. As millions of Baby Boomers begin to These guiding principles provide a foundationenter retirement, it appears that many indicate upon which to develop home-equity productsinterest in using this asset to maintain their and public policy that can better serve aginglifestyle throughout retirement, if necessary. homeowners. They also highlight the importanceThe findings suggest that the financial services of greater mutual understanding and cooperationindustry, policymakers, and advocates for older to accelerate learning and spur the developmentadults cannot ignore home equity in their efforts of affordable solutions and effective public policyto promote retirement security. to better serve older homeowners. Financial professionals can work with consumer advocatesThe diverse needs and expectations of older to strengthen financial literacy programs forhomeowners indicate that it will be important homeowners of all ages. Organizations that offerto strengthen retirement planning strategies reverse mortgage counseling, debt management,beyond simple models of asset accumulation and benefits counseling need to work togetherand decumulation. The study identifies four key to make sure that older Americans use homeprinciples that should guide the development equity wisely. By working together, the financialof a more comprehensive approach to ensuring services industry, U.S. Department of Housingfinancial security in later life: and Urban Development (HUD), and aging organizations may be able to speed up the development and testing of lower-fee reverse›  Use a holistic, person-centered framework— mortgages and other financial products that Strategies need to shift from product-focused can meet the needs of homeowners with solutions to comprehensive financial plans modest housing wealth. that include home equity as an integral part of retirement security. Recent trends show a small but increasing use of home equity among older homeowners›  Promote flexibility—Older homeowners when considering the size of the eligible need multiple, affordable products that can population. However, they serve to remind meet both their long- and short-term us that people are not complacent about their financial goals in retirement. growing retirement risks. Americans are proud of their resourcefulness. Growing numbers of›  Address changes over the life course— older homeowners will benefit from additional Financial, health, family needs, and risks support and guidance, since the decisions that change as people grow older and need to be homeowners make about this valuable asset will considered when home equity is included have long-term ramifications for the well-being in financial planning. of older Americans and for our nation. TAPPING HOME EQUITY IN RETIREMENT 5
  6. 6. IntroductionThis study examines different options for using The concerns of homeowners in or nearinghome equity to cope with financial shortfalls in retirement put a human face on a complexlater life. The study incorporates a wide array of economic issue. The choices that they make,consumer data to highlight the decisions that and the problems they face, also highlight thetoday’s older adults make about this asset, and difficulty of shifting from a financial planningthe need for new solutions as the oldest Baby strategy that aims to preserve housing wealth toBoomers begin to enter retirement. The 2007 one that uses this asset as a retirement resource.American Housing Survey and the 2007 Survey Most older adults have limited amounts ofof Consumer Finances provide a snapshot of home equity, and face difficult decisions andthe prevalence of home loans among older trade-offs:homeowners. Other consumer surveys citedhighlight the changing attitudes of older adults ›  Should they tap housing wealth early in and Baby Boomers toward the house as a retirement to sustain income security?source of cash. This data provides a glimpseinto the opportunities and issues which may ›  Should they wait and use this asset as a lie ahead and the potential for new solutions financial buffer to cope with an increasinglyto an evolving challenge. uncertain future? ›  How will the need to manage growing amounts of consumer debt influence these decisions? It is not just older Americans who worry about using home equity wisely. Policymakers are concerned that older adults who tap this asset to pay for everyday expenses will have fewer resources to deal with declining health in later life. Many states already struggle to pay for public programs, such as Medicaid, that assist older adults with low incomes and those who are impoverished by health expenses. Financial shortfalls among middle income older adults that accelerate the need for public assistance could make these fiscal pressures even greater. Some financial professionals are also questioning the value of retirement planning models based on steady asset accumulation and decumulation in our uncertain economic climate.1 It is unclear whether such traditional financial advice will help older homeowners use6
  7. 7. home equity effectively to manage retirement old with dignity and security. An importantrisks. To provide a more comprehensive objective of this study is to use the experiencesperspective, the study includes existing of older homeowners, along with existingeconomic and housing research that evaluates research, to outline specific principles thatthe capacity of housing wealth to sustain can guide the design of new solutions. Theconsumption in retirement. diverse data presented here also offers a foundation to promote discussion amongThe aim of this study is to encourage the the financial services industry, governmentdevelopment of a more robust and holistic policymakers, and aging organizations. Greaterapproach to managing financial risk in mutual understanding and cooperation canretirement through the use of home equity. accelerate learning and spur the development ofThis effort reflects a growing awareness that affordable solutions and effective public policynarrow visions and simplistic strategies will to better serve older Americans.not be enough to allow Americans to grow TAPPING HOME EQUITY IN RETIREMENT 7
  8. 8. Home Equity as a ResourceAs a starting point for examining home equity where houses appreciated dramatically,as a retirement resource, it is important to such as Los Angeles, single-family home valuesconsider two questions. After the collapse of dropped on average by over 31%, from $594,000the real estate market, how much money is left to $402,000 between 2007 and 2008.3in the house to pay for retirement expenses? Price declines were smaller in the SouthSecond, how willing are older homeowners (7.5%) and Midwest (10.6%), where home valuesto use this asset as more than a last resort have remained at more modest levels. Theseto maintain their well-being? figures may underestimate true home values, since many properties that are sold today areThe need to use the house as a source of cash is foreclosures offered at deeply discounted prices.influenced by the availability of other financialresources. Some homeowners with lower to Real estate declines reduce the overall wealthmiddle incomes also find that the choices of all homeowners, especially older ones.available to tap this asset are limited because The declines are especially problematic forthey do not qualify financially for certain home people who have to sell their homes in aloans. Many wonder whether the equity they declining market. However, homeownershave left in their homes can offer any solutions who can weather the storm may see hometo enhance retirement security. values rise again in the future. This is an option for many older Americans, who preferHow Much Equity Is Left? to stay in their homes for as long as possible,Economists estimate that homeowners in the and have realized relative gains from theirUnited States lost a total of $3.3 trillion in original home purchase price. In 2007,property value in 2008.2 The magnitude of these almost 80% of older households ownedprice declines varies across housing markets in a home, including almost 78% of thosedifferent parts of the country. In communities age 75 and older.4 Figure 1: ortgage Status Among Homeowner Households M Age 62 and Older Regular Mortgage Only 21.5% No Home Loan Regular Mortgage + 64.5% Home-Equity Loan 4.8% Home-Equity Loan Only 8.5% Reverse Mortgage Source: American Housing Survey, 2007. 0.7%8
  9. 9. Among today’s older adults, the decision to the rapidly growing interest in and knowledgeliquidate home equity is often influenced by of reverse mortgages is often seen as a signal thatdeeply held values. As a consequence, some older homeowners are becoming more willingeconomists and policymakers have questioned to use home equity as a retirement resource. Thewhether home equity should be viewed as a popularity of these loans may also reflect the factretirement asset. Older homeowners tend to see that, unlike conventional loans, lenders do notthe house as a place to live rather than a source consider a borrower’s income or credit historyof cash. Many are oriented to leaving the family to determine eligibility for a reverse mortgage.home as a bequest to their children. In 2007, However, the maximum amount that can bealmost 65% of the 21.7 million homeowner borrowed is limited by the value of the home,households headed by someone age 62 and the homeowner’s age, and an overall limit setolder owned their homes free and clear of any by the Federal Housing Administration (FHA).mortgage (see Figure 1). Diverse NeedsAlthough older adults want to preserve home The resources that people can accumulateequity, many are finding it harder to achieve during their working years have a major impactthis goal in the face of rising economic on their financial well-being as they growchallenges. The proportion of households age older. Periods of economic boom and recession65 and older that have a home loan has grown also affect how people born at different timessignificantly in recent years, from 24% in 1999 experience retirement, and the challengesto 32% in 2007.5 There are two explanations they face. To gain insights into these diversefor this trend. One reason is that more experiences, and the need to tap home equity,homeowners are entering retirement without homeowners’ households were divided intohaving paid off their regular mortgage. In four groups. These groups reflect differences in2007, about one in five homeowner households annual income and home values, and include:age 62 and older still had a regular mortgage(see Figure 1). Due to historically low interest ›  House-poor and cash-poor—Low incomes rates at the early part of this decade, many (under $20,000) and home equity under(some older workers and retirees) may have $125,000.6been able to refinance their mortgage andreduce their monthly payments to levels they ›  House-rich and cash-poor—Low incomes feel they can handle in retirement. and homes worth at least $250,000. 7Some older homeowners are also cashing-out ›  Moderate wealth—This group included a portion of their housing wealth. Over 13% two types of households: a) those with lowof homeowner households had a home equity incomes and homes worth $125,000 tolump sum payment or line of credit in 2007. under $250,000, and b) those with moderateA significant proportion of these borrowers incomes between $20,000 and $40,000 andare making monthly payments on both an homes worth less than $250,000.existing mortgage as well as a home-equityloan. In addition, about 1% of older households ›  House-rich or cash-rich—This group have taken out a reverse mortgage. Although included two types of households: a) thethe number of these borrowers is small, cash-rich—those with incomes above TAPPING HOME EQUITY IN RETIREMENT 9
  10. 10. Home Equity as a Resource $40,000 and homes worth less than $250,000, not have a mortgage. Encouraging them to and b) the house-rich—those with moderate take out a home loan could be risky, since their incomes between $20,000 and $40,000 and limited financial literacy often makes them homes worth at least $250,000. targets for financial fraud and abuse. The HUD HECM (Home Equity Conversion Mortgage)›  House-rich and cash-rich—Households with reverse mortgage program was originally incomes of at least $40,000 and homes worth designed to help house-rich and cash-poor older at least $250,000. adults use their substantial housing wealth to improve their financial well-being.One in five older households is cash-poor (seeTable 1). They are typically among the oldest About 30% of older homeowner households fallhomeowners, with a median age of 76. For these into the moderate wealth group. While theseolder adults, whose lives were likely touched older adults are not poor, they may still fallby the Great Depression, the current economic short of economic security due to their modestslump is nothing new. Many have learned incomes and housing wealth. As a result, theyover many years how to cope with financial may be interested in using home equity as ashortfalls. Their life experiences may also have buffer against unexpected health expenses orlimited their ability to get a good start in life, home repairs. At the higher end of the middle-which may account for their lower education income group, house-rich or cash-rich olderlevels. With very modest incomes, and an homeowners have a more substantial financialaversion to debt, most of these older adults do cushion to sustain them in retirement. Most Table 1: ttributes of Homeowner Households Age 62 and Older, A by Wealth Status AFFLUENT MIDDLE INCOME POOR House-rich House-rich House-poor House-rich Moderate and cash- and cash- and cash- or cash-rich wealth rich poor poor Median Household Values Age of householder 69 70 73 76 76 Home value $409,000 $175,000 $125,000 $350,000 $65,000 Household income $81,900 $49,800 $25,324 $12,468 $12,000 Other Household Demographics Married 75.9% 64.9% 48.0% 27.3% 22.7% Has a college education 55.2% 34.1% 15.6% 20.7% 8.3% Householder worked last week 32.6% 24.8% 12.5% 5.7% 5.5% No mortgage 48.1% 59.7% 71.6% 70.8% 79.3% Total Homeowner households age 62+ 4,353,625 6,449,825 6,562,602 1,037,121 3,348,454 % of total households (21.75 million) 20.0% 29.7% 30.2% 4.8% 15.4% Source: National Council on Aging (NCOA) calculations based on data from the American Housing Survey, 2007.10
  11. 11. homeowner households in this group are Unlike a home-equity loan or traditionalmarried (64.9%) and one-quarter (24.8%) are mortgage, with a reverse mortgage there arestill working. However, fewer have paid off their no monthly payments. The loan becomes duemortgage (59.7%), which can be an additional when the borrower sells the home, permanentlystress on the monthly budget. moves out, vacates for a period of 12 months, or when all the homeowners are deceased.Affluent older homeowners are relatively At that time, the loan principal, interestyoung (median age 69) and are predominantly charges, and any fees must be paid in full.married couples. These households have sizablefinancial resources, which may reflect the fact The need to tap home equity depends onthat one-third (32.6%) are still in the labor the availability of both financial and socialforce. Over half (51.9%) are also still making resources. These factors vary significantlymonthly mortgage payments. A challenge for among the four different housing groups. Asmany of these homeowners will be whether they a result, older homeowners may decide to tapcan afford to retire. They may be interested in home equity for many different reasons, suchexploring new options to incorporate housing as a source of additional monthly income or towealth in their asset allocation strategies. manage debt. Older adults’ financial situations also affect the loan options that they can use toIssues and Challenges liquidate a portion of their housing wealth.Despite their limited retirement resources,only 14% of homeowners age 62 and older Affluent older adults can select from a widehave decided to use a home-equity loan range of conventional loans. Older homeownersor reverse mortgage to get cash from their who do not qualify financially for a regularhouses. Traditional attitudes toward the house mortgage may end up with a subprime loanmay explain why some older Americans are which carries a higher interest rate and thereluctant to tap home equity. The fact that older risk of financial exploitation. These findingsadults still overwhelmingly select home loans that suggest that one-size-fits-all solutions will notrequire monthly payments may also be a factor in be adequate to ensure retirement security forthis decision. Borrowers are vulnerable to financial homeowners across the economic spectrum.stress or foreclosure when faced with risingexpenses or declining income (i.e., reduction in Although the numbers are small, it appearsSocial Security benefits or loss of spouse’s pension). that older Americans increasingly see their homes not just as secure places to live, but alsoReverse mortgages generally do not affect Social as collateral for a loan. It will be importantSecurity and Medicare benefits. However, to monitor this evolving trend to understandneeds-based benefits, such as Medicaid and how homeowners who are in or nearingSupplemental Security Income (SSI), may be retirement use this asset to solve financialimpacted. Most reverse mortgages, in addition problems. Researchers should also trackto interest charges, have an origination fee, changes in mortgage lending to older adults.closing costs, a mortgage insurance premium, One challenge is that federal sources of data onand a monthly service fee. These amounts can lending practices, such as the Home Mortgagebe paid by the reverse mortgage itself, so there is Disclosure Act (HMDA) database, do notno immediate burden to the borrower. The costs collect information on the age of borrowers.are added to the principal and paid with interestwhen the loan becomes due. TAPPING HOME EQUITY IN RETIREMENT 11
  12. 12. Strategy #1—Increase Income SecurityThe foundation for retirement security has Sustain Cash Flowtraditionally likened to a three-legged stool As the cost of living continues to rise, manyconsisting of savings, pensions, and Social Security. older Americans find it hard to make endsRecent financial trends suggest that this conventional meet. Researchers estimate that nearly 78%approach is becoming less effective. The savings rate of all older adult households do not haveamong Americans has declined significantly since sufficient resources to sustain them throughthe 1980s—reaching its lowest level in 2004 since their retirement years.8 Baby Boomers are alsothe Great Depression—although it recently turned concerned about being able to maintain theirupward (see Figure 2). Compounding these cash standard of living as they grow older. Oldershortfalls is the decline of defined benefit plans, workers who expect inadequate retirementwhich leaves many Americans facing a future income, or a less reliable source of income, suchwith less guaranteed retirement income. as a defined benefit plan, are more likely to plan to use home equity to pay for retirement expenses.9To maintain their standard of living, someolder homeowners are starting to convert Cash-poor older households often find ithome equity to monthly income. This approach difficult to pay the bills each month. Highis a relatively new concept that has gained monthly expenses can be especially problematicmomentum with the development of reverse for households who are house-rich and cash-mortgages. Financial professionals are also poor. A high proportion of these homeownersbeginning to explore different options for using are elderly widows who may have seen theirhome equity to increase annuitized income. income drop significantly when their husbands Figure 2: hifts in Family Resources S % of disposable Median sale price, income in thousands 12% $260 $240 10% $220 8% Personal $200 S avings 6% Single-Family $180 Home Price $160 4% $140 2% $120 0% $100 1 992 1994 1996 1998 2000 2002 2004 2006 2008 Personal Savings Single-Family Home Price Source: Bureau of Economic Analysis National Economic Accounts; Prices for homes with conventional single-family non-farm loans, Federal Housing Bureau Historical Summary, Table 36.12
  13. 13. Table 2: inancial Challenges of Homeowner Households Age 62 and Older, F by Wealth Status AFFLUENT MIDDLE INCOME POOR House-rich House-rich House-poor House-rich Moderate and cash- and cash- and cash- or cash-rich wealth rich poor poor Housing Attributes Year bought the home 1988 1984 1982 1979 1980 Home built after 1975 37.3% 28.8% 25.3% 25.3% 20.9% Electricity bill more than $100/mo. 59.0% 49.0% 38.0% 36.3% 31.8% Real estate taxes $3,000 or more 48.1% 19.8% 8.5% 29.9% 3.7% Other Household Demographics Single women householders 15.4% 24.1% 39.1% 57.6% 60.8% Lives in central city or suburb 63.4% 55.3% 48.1% 70.9% 38.0% Source: NCOA calculations based on data from the American Housing Survey, 2007.died (see Table 2). Almost 71% live in central additional income each month by “annuitizing”cities and suburbs where the cost of living their housing wealth.and property taxes tend to be high. They alsohave a substantial amount of housing wealth Most middle-income older adults also have(median value $350,000; see Table 1). By limited amounts of housing wealth that theyselecting a tenure payment plan, a 75-year-old could use to supplement their incomes. Forreverse mortgage borrower with a home worth example, a 75-year-old borrower with a home$350,000 could receive almost $1,500 each worth $125,000 could receive about $500 eachmonth tax free for as long as they live in their month from a reverse mortgage. This amounthome. This amount would more than double might not significantly increase their standardtheir monthly income. of living. These funds could increase retirement security for households with moderate wealthOlder homeowners who are house-poor by filling gaps between the cost of living andand cash-poor may be less likely to benefit available income. As they feel the pinch, 70% offrom a reverse mortgage. Most of these older Americans age 60 and older are already cuttingadults live in smaller communities and rural back on essentials such as transportation orareas where home values are relatively low food.10 Others are economizing by lowering the(median value $65,000; see Table 1). They heat or turning off lights, which can significantlyalso tend to live in older homes that may increase the chances of a serious accident orneed additional repairs in order to qualify illness. One in three older adults fall each year,for a reverse mortgage. As a result, most of most commonly in their homes, resulting inthese homeowners would receive very little almost 1.7 million injuries annually.11 TAPPING HOME EQUITY IN RETIREMENT 13
  14. 14. Strategy #1—Increase Income SecurityIncrease Annuitized Income could continue working. However, this optionWhile some aging homeowners must deal may be difficult for workers in physicallywith immediate cash shortfalls, others look demanding occupations, and those who areahead and worry that they may come up short. limited by health problems. To help workersAt age 65, American men can expect to live who anticipate a long life, and who must retirean additional 17 years, and women 20 years, before age 70, some financial professionalson average.12 With increasing longevity, there are recommending a term home-equity loanis some chance that they may outlive their or reverse mortgage to help pay for everydayretirement resources. Maintaining financial expenses for a few years until they are eligiblesecurity over many years will be especially for maximum Social Security benefits.challenging for many Baby Boomers who cannotrely on guaranteed retirement income from an Figure 3 highlights how this strategy couldemployer-sponsored defined benefit pension plan. work for a middle-income woman age 62 with a home worth $150,000 and with anOne option to increase monthly annuitized annual salary of $50,000. If she chose to retireretirement income is to defer Social Security at age 62, her monthly Social Securitypayments. Retirees receive a reduced monthly payment would be $1,013. If she waited untilbenefit at age 62 and progressively larger age 70, she would receive $1,953 per month.benefits for each month they postpone To maximize her benefit:benefits up to age 70. Elderly widows could ›  She would need to get an additional $1,013 see the greatest benefit, since deferral would per month from a reverse mortgage for eightincrease the expected value of their monthly years (total $97,248) if she stopped workingsurvivor benefits.13 To maximize their monthly at age 62, but deferred her Social Securitypayments, as well as that of their spouses and benefits until age 70. This approach wouldother dependents, people near retirement rapidly deplete home equity. Figure 3: quity Draw-Down with a Reverse Mortgage to Defer Social Security E Remaining Home Equity $150,000 $100,000 $50,000 $0 1 3 5 7 9 11 13 17 19 Duration of Loan (years) 4 years, $500/mo 8 years, $500/mo 8 years, $1,013/mo Source: NCOA calculations using the Reverse Mortgage Analyzer—HECM monthly CTM 200 loan; appreciation rate 2%, expected interest rate 4.91%.14
  15. 15. ›  If she switched to part-time work at age 62, payments. Longevity annuities require a smaller and drew $500 per month from a reverse investment than an immediate annuity because mortgage to supplement her income until age they usually do not begin payouts until after age 70, she could lock in an additional $940 per 80 or 85. This approach could be attractive to month in Social Security benefits starting at older Americans who worry that purchasing an age 70, and still retain a significant amount immediate annuity will leave them little cash to of home equity. pay for unexpected expenses or to leave a bequest. Consumers should carefully examine the fees›  If she worked full-time until age 66, then associated with longevity annuities, since they switched to part-time work and drew $500 can be expensive. per month from a reverse mortgage for four years, the potential impact on her Issues and Challenges home equity might be minimal, at current A fundamental component of retirement interest rates and with modest (2%) home security is having enough income to meet basic appreciation per year. expenses. Conventional wisdom encourages people to save as much as possible duringThe net benefit of this approach would depend on their working years so they can maintain theirhow long a person (and spouse) lived after age 70, standard of living in retirement. But withchanges in interest rates, and the duration of the sizable losses to retirement savings plans inloan. Borrowers who moved soon after reaching recent years, along with the growing cost ofage 70, and paid off their reverse mortgages, basic necessities, it is harder for many peoplewould pay less in total interest on their loans to accumulate enough funds to ensure athan those who continued to live in the same comfortable retirement. As Americans enterhouse for many years. Given the complexity of their retirement years, they may need tothis financing option, older workers would need reevaluate their financial situation and convertto carefully evaluate the potential long-term some of their housing wealth to income toramifications of this approach. supplement the family budget. Researchers generally agree that using a reverseFinancial professionals are also exploring the mortgage to supplement income can be anpossibility of using home equity to supplement important option for house-rich and cash-income when the financial market conditions poor older homeowners who may otherwiseare depressed. In 2008, workers with 401(k) live in poverty.15 However, as shown in Table 1,plans worth over $200,000 saw their account low-income older adults with sizable housingbalances decline by over 25%.14 Tapping home wealth are relatively rare, and represent lessequity would reduce the need for retirees to than 5% of all older households. Withoutspend money from a recovering retirement additional support, the majority of poor olderaccount or to liquidate income-generating homeowners are unlikely to benefit fromassets to support consumption. liquidating housing wealth through a home loan. Combining public benefits with modestAnother option for older homeowners to amounts of home equity could be anotherensure retirement income would be to buy a option to enable some older homeowners with“longevity” annuity with their savings, and tap modest means to continue to live at home withsmall amounts of home equity to fill financial greater dignity and security.gaps until they start to receive their annuity TAPPING HOME EQUITY IN RETIREMENT 15
  16. 16. Strategy #1—Increase Income SecurityThere is less consensus about the value of older adults today already have a sizable portionannuitizing home equity to support income of their income annuitized through definedsecurity among middle-income households. benefit pension plans and Social Security.A recent study estimated that the medianincrease in income for these older adults may Baby Boomers who tap home equity duringbe able to increase their income by less than their working years will have less housing28% through a reverse mortgage.16 Many feel wealth left in retirement. These homeownersthat such modest amounts of extra cash will may be interested in targeted, short-term homenot guarantee retirement security for many loans that can help them defer Social Securityolder homeowners.17 payments or delay the liquidation of depressed equity. Such strategies highlight the new waysA major barrier to annuitizing housing wealth in which financial professionals are beginningis consumer receptivity to this approach. Taking to incorporate home equity as a retirementout a loan to support everyday consumption, resource. Older homeowners need to scrutinizerather than to make home improvements these financing options carefully, to ensure thator otherwise increase wealth, goes against short-term solutions do not grow into long-conventional wisdom. Many older homeowners term problems. Younger borrowers shouldfeel that this strategy is only appropriate for also weigh the benefits of taking out a reversefinancially desperate older adults. When asked, mortgage early in retirement, since the amount36% of homeowners age 65 and older can think that a borrower can receive from these loansof no benefit for older adults to use home equity increases substantially with age. Mandatoryto stay at home.18 Older Americans are usually reverse mortgage counseling by HUD-approvedreluctant to annuitize their retirement wealth. agencies is an important source of independentThis attitude may reflect the fact that many information about these loans. Consumer advocates and the financial services industry have raised concerns about cross- selling annuities and other financial products with reverse mortgages. The Housing and Economic Recovery Act of 2008 strengthens consumer protections by forbidding lenders from requiring borrowers to buy other financial products (such as annuities or insurance) as a condition for taking out a reverse mortgage. Also, the Financial Industry Regulatory Authority (FINRA) has an investor notice strongly cautioning investors against using home equity to purchase investments. FINRA has also put financial service firms on notice that recommending the use of home equity to purchase investments is not a suitable recommendation. Homeowners who are considering these options will need additional financial education to make wise decisions.16
  17. 17. Strategy #2—Enhance Financial ResilienceRetirement has always been a time of financial Those who see home equity as a “last resort”uncertainty. Not knowing how long they will typically wait to liquidate home equitylive, or the extent of their health needs, makes until they face a major life change, such asit difficult for older people to decide when to widowhood or the nursing home needs of aspend their financial resources. With increasing spouse.21 At this point in life, homeownerseconomic uncertainty, they face even greater usually decide to sell their homes.challenges. As an alternative to using homeequity for regular consumption, older adults A small proportion of older homeowners aremay want to improve their retirement security beginning to use home-equity loans to pay forby preserving this asset as a cushion against health and long-term care needs. A 2007 surveyunexpected events. by the Commonwealth Fund found that 8% of older adults with medical bills or medical debtOlder Americans who own their homes free problems took out a mortgage or loan to pay forand clear of any mortgage often value the house these costs.22 About 28% of reverse mortgageas a type of “insurance.” The challenge forhomeowners who opt for this traditional useof home equity is knowing how long to wait,especially if they face increasing financialhardship. They also need to decide how to tapthis asset when that “rainy day” arrives.Self-InsuranceMost Americans want to continue to stayat home for as long as possible. They worryabout large and unexpected out-of-pocketcosts that can disrupt their ability to sustainthemselves financially. One of the biggestuncertainties is out-of-pocket costs dueto declining health and ability. Medicaland long-term care expenses often lead toconsiderable wealth depletion among olderadults who live in the community.19 Marriedcouples may also want to keep their assetsuntil late in life, to cover the substantialend-of-life medical and funeral costs thatcan leave widows impoverished.20Consumer surveys find that olderhomeowners today typically preserve homeequity to protect themselves financiallyagainst potentially catastrophic expenses. TAPPING HOME EQUITY IN RETIREMENT 17
  18. 18. Strategy #2—Enhance Financial Resilienceborrowers take out this loan due to concerns retirement years may also find that they do notabout out-of-pocket health and disability- qualify for coverage due to an existing healthrelated expenses.23 Only about 5% of these condition or find they can no longer afford it.borrowers use their loan funds for immediate Policymakers, advocates, and insurancehealth needs, suggesting that they may be companies have raised serious concerns aboutplanning ahead for these financial risks. using home equity to purchase long-term care insurance.The possibility of receiving help at home, ratherthan in an institution, may also encourage However, home equity may play a different roleyounger homeowners to tap home equity to support Baby Boomers who buy long-termbefore they face a health crisis in retirement. care insurance. A recent survey found that 84%A recent survey found that a high proportion of Americans who purchased a policy in 2008of Boomers turning age 62 see long-term were under age 65.25 To save costs, 76% of thesecare as an important reason to consider a buyers opted for coverage that would pay forreverse mortgage (see Figure 4).24 Over 70% a claim lasting five years or less. As they growof those with very modest retirement assets older and start to need help, policyholders may(household net worth of less than $50,000) may want to save their limited insurance coveragebe planning to use home equity to pay these to pay for serious disabilities. They could tapexpenses as they grow older. home equity to pay for low-cost services that make it easier to stay at home. Small amountsOlder Americans often rely on housing wealth of home equity could also pay for earlybecause they did not purchase long-term interventions that can reduce health problems.care insurance. Those who wait until their Figure 4: Reasons Boomers at Age 62 Might Consider a Reverse Mortgage Assets $500K+ $250–$500K $100–$250K $51–$100K $50K 1 10 20 30 40 50 60 70 80 90 % Immediate Needs Extra Cash LTC Needs Source: MetLife Mature Market Institute, Boomers: Ready to Launch, 2007.18
  19. 19. Figure 5: ising Home Values, by Age R Thousands of 2007 dollars 200 100 $0 1989 1992 1995 1998 2001 2004 2007 Year 55–64 65–74 75 or older Median value of primary residence. Source: Survey of Consumer Finances Chartbook, 2007.Financial Buffer the unexpected. The most common approachOne of the greatest fears of older Americans today is to take out a home equity line of creditis ending up in a nursing home. Due to (HELOC). Homeowners often use a HELOCimprovements in health and growing options to pay for home renovations. Many reversefor community living, however, the risk mortgage borrowers also select a line of creditof needing institutional care has declined payment option to address a wide array of basicsignificantly. As a result, a greater challenge necessities. This financing strategy can be cost-for many retirees will be to maintain financial effective, since borrowers only pay interest onstability as their needs change over time. the amount that they use from the loan.Older adults often require assistance withtransportation, grocery shopping, or other The popularity of HELOCs, and increasinglyhousehold chores to cope with declining health. reverse mortgages with line of credit paymentFor many people, these added expenses are a plans, suggests that an important reason whyreal burden. older Americans already tap home equity is to enhance their financial resilience. In fact, 93%The homes of older adults are also getting older of reverse mortgage borrowers reported thatand may erode in value if homeowners do these loans have had a positive effect on theirnot keep up with repairs and improvements. lives.27 Having a cushion of readily accessibleResearchers have found that appreciation rates funds can encourage older homeowners to actfor similar homes are considerably smaller sooner, to keep small problems from becomingwhen the household head is over 75 years old.26 a costly crisis. For example, carbon monoxideThis can be a serious financial drain for older fumes from faulty furnaces, gas water heaters, andadults who already own modest value homes ranges can have a serious effect on people with(see Figure 5). heart disease.28 Replacing a leaky roof or faulty furnace before they cause structural damage or aWith limited amounts of home equity, older serious illness reduces the chances that a personhomeowners may benefit from using these will exhaust their retirement savings.funds sparingly as a financial buffer to manage TAPPING HOME EQUITY IN RETIREMENT 19
  20. 20. Strategy #2—Enhance Financial ResilienceIssues and Challenges Homeowners who are looking for shorter-termWhile many older Americans worry about solutions need to be careful about the typeoutliving their savings, an equally important of loan they select. Borrowers who opt for arisk may be under-spending that can HELOC must have sufficient funds available tocompromise an older person’s health and pay the loan at the end of the term. They mayhome environment. The ability to live at home also want to have an emergency cash fund tois a dynamic process, where the situation ensure that they can continue to make monthlycan change rapidly. To make sure that they loan payments. As non-recourse loans, reversecan stay in control, older adults and family mortgages provide important protections againstcaregivers need to be able to implement foreclosure. However, using these loans to accesseffective solutions quickly. A growing small amounts of funds may not be worth thechallenge will be to help older adults find a high transaction costs. More research is neededbalance between using home equity to address to evaluate the trade offs between the costsimmediate needs and preserving this asset versus protections of different home loans.to help ensure retirement security. The suitability of using home equity as a financialSaving home equity as a last resort may seem buffer will also be influenced by the abilityto be the safest way to protect this valuable of older homeowners to continue to live inasset, but during periods of economic volatility, their homes. While most older adults want tosuch conventional wisdom may no longer stay at home for as long as possible, HUD hasserve older adults well. Those who plan to found that over half of reverse mortgages aretap this asset only when they have an urgent terminated within six years after origination.29need may not know how much home equity Without additional support for communitywill be available when they need it, due to living, it may be more appropriate for an olderfluctuating interest rates and changing home homeowner to sell the house rather than incurvalues. It may also be difficult to get a home substantial transaction costs to liquidate homeloan quickly to deal with a crisis situation. equity through a home loan.30 These findingsThe recent crash of the real estate market also highlight the growing need to strengthenfurther highlights the difficulties that older partnerships between aging organizations andadults can face when they need to sell their the lending community to ensure that olderhome in a hurry. borrowers can meet their life goals.20
  21. 21. Strategy #3—Improve Debt ManagementA common characteristic of today’s older money, and stay out of debt.” A recent studyadults, especially those whose lives were found that 40% of people age 62 to 75 alreadytouched by the Great Depression, is their have, or expect to have, mortgage debt inaversion to debt. These attitudes may also retirement.32 These financial difficulties increasereflect the fact that there were few opportunities the need for debt management among olderto cash out home equity before the 1980s. homeowners.Since then, Congress has enacted severallaws that have liberalized lending standards Transfer Debtand promoted the development of new loan It is difficult to maintain financial stabilityproducts, including home-equity loans and in the face of rising household expenses. Forsubprime loans. As retiree incomes are being older adults living on a fixed income, the mostsqueezed, older Americans have been taking readily available solution may be their creditadvantage of easier access to credit. cards. The proportion of older families who use this financing option is growing. Since 1998,Several studies show that consumer spending self-reported credit card use among familiestends to increase as home values rise.31 headed by someone age 75 and older has almostHaving this extra financial cushion may give doubled to 19% (see Figure 6). Among familieshomeowners more confidence to spend rather age 55 to 64, about half carry credit card debt.than save for a rainy day. But for some people,their expenditures have been growing faster Even though more older people use creditthan their incomes. Younger retirees and Baby cards, their balance amounts are not excessive.Boomers are finding it especially hard to follow Families age 65 to 74 typically owed aboutthe traditional advice of “work hard, save $3,000 in 2007, while those age 75 and older Figure 6: Families with Credit Card Balances, by Age % 60 50 40 30 20 10 0 1989 1992 1995 1998 2001 2004 2007 Year 55–64 65–74 75 or older Source: Survey of Consumer Finances Chartbook, 2007. TAPPING HOME EQUITY IN RETIREMENT 21
  22. 22. Strategy #3—Improve Debt Managementhad a balance of $800 on average.33 The their credit cards. This can be difficult for low-challenge for these families is that banks have income families who struggle to meet everydayrecently begun increasing interest rates sharply expenses each month.and reducing credit card limits. As a result,many borrowers find they have to make higher Defer Mortgage Paymentscredit card payments each month. They often The type of loan that homeowners select toface substantial fees and other penalties when resolve their financial problems can have athey are late on their payments. Borrowers big impact on their financial well-being inon fixed incomes may have little left after retirement. One in five older households thatpaying their credit cards to also make monthly are house-poor and cash-poor still has amortgage payments. mortgage (see Table 3). They may face sizable monthly payments, especially if they did notOne consequence of ready access to credit has qualify for a regular mortgage, and opted insteadbeen the growing proportion of people age for a subprime loan with higher interest rates.55 and older who face bankruptcy. Between1991 and 2007, the bankruptcy rate among Of the 7.7 million older households withpeople age 55 to 64 grew from about 6% to housing debt, almost 58% are middle-incomeover 15%.34 The proportion of people age 75 families in the moderate wealth or house-richand older who face bankruptcy, while small, or cash-rich groups. Although they may notgrew substantially from 0.3% to 2% during this be struggling, additional mortgage paymentsperiod. The additional pressures that credit card can increase their financial vulnerability. Basedborrowers now face will likely push more older on the Elder Economic Security Standardhomeowners into bankruptcy or foreclosure. Index, single homeowners with a mortgage typically need about $19,000 per year in basicDebt consolidation is a common option to income to live in a moderate-cost city such asdeal with this financial challenge. Under this Minneapolis.35 They require over $33,000 perapproach, older adults shift their unsecured year to maintain a basic standard of living inconsumer and credit card debt to a home loan higher cost areas such as Los Angeles.36such as a HELOC or reverse mortgage. Whenused wisely, this strategy can lower monthly Over half (51.9%) of affluent older homeownerexpenses since interest rates for home-secured households have some type of home loan (seedebt are much lower than those for credit cards Table 3). Of households with home loans, theytoday. Older homeowners who use a reverse are also most likely to have multiple loansmortgage for this purpose may increase their (21.6%). Sizable housing debt can make it hardavailable monthly income because they are for affluent homeowners, many of whom stilldeferring all payments on their bills until they work, to retire and enjoy the balance of theirmove out of their homes. lives. These households are also most likely to be pulling cash out of their houses with home-Using home equity to avoid bankruptcy can equity loans. About 45% use this financingbe an important safety net for cash-strapped option, often in combination with a regularolder adults. However, this approach also mortgage. Since these borrowers are relativelypresents some challenges. Homeowners need young (median age 66), they run the risk ofto maintain financial discipline to avoid the spending a large portion of their housing wealthrisk of going further in debt if they keep using early in retirement.22
  23. 23. Table 3: ype of Home Loans Used by Homeowner Households, Age 62 T and Older with Housing Debt, by Wealth Status AFFLUENT MIDDLE INCOME POOR House-rich House-rich House-poor House-rich Moderate and cash- and cash- and cash- or cash-rich wealth rich poor poor Type of Loan Regular mortgage only 54.4% 60.6% 63.0% 64.0% 71.6% Regular mortgage home-equity loan 21.6% 12.3% 8.5% 12.2% 5.3% Home-equity loan only 23.2% 24.7% 25.8% 18.1% 21.5% Reverse mortgage 0.8% 2.3% 2.7% 5.8% 1.6% Total with a Home Loan Homeowner households age 62+ 2,260,049 2,597,712 1,865,671 302,601 694,258 Percent of total households in group 51.9% 40.3% 28.4% 29.2% 20.7% Source: NCOA calculations based on data from the American Housing Survey, 2007.Borrowers who must continue to make regular Anecdotal evidence suggests that growingmortgage payments in retirement, and those numbers of older homeowners are taking outwho get cash through a conventional home- this type of loan specifically to avoid the needequity loan, are placing their houses at risk. to make monthly mortgage payments.As they age, people face a growing possibility Issues and Challengesthat a costly health problem could disrupt Using home equity to manage debt becametheir family budgets. When they cannot make popular after the Tax Reform Act of 1986their monthly loan payments, they may lose phased out the deduction for interest on credittheir houses. A recent study found that by the cards, auto loans, and most other types ofend of 2007, more than 684,000 homeowners consumer debt while preserving tax deductionsage 50 and older were delinquent in mortgage for certain home loans. Since then, borrowerspayments or in foreclosure.37 have shifted from installment plans to tax- advantaged mortgages and home-equity loansA reverse mortgage allows older homeowners to pay for major purchases such as cars andto defer monthly mortgage payments on a appliances. Easy access to credit also providedconventional home loan. Borrowers (or their lower-income households with greater liquidityheirs) do not have to repay the loan until the to purchase the goods and services that theylast borrower dies, permanently moves out, or need to continue to live at home.vacates for a period of 12 months. About 46%of reverse mortgage borrowers surveyed by Using housing wealth to manage consumerAARP have paid off their regular mortgage in debt can enhance a person’s standard of living.this way.38 Some are transferring their existing But if this resource is not used wisely, it canhousing debt to meet the requirement that a also be a source of financial insecurity. Olderreverse mortgage be in primary lien position. homeowners often take on sizable debt without TAPPING HOME EQUITY IN RETIREMENT 23
  24. 24. Strategy #3—Improve Debt Managementconsidering the potential impact of these loans little or no home equity left after they repay theon their long-term retirement security. Shifting loan. This could be problematic for older adultsdebt from credit cards to a home loan can who need to move to an assisted living facilityextend payments over many years. Even at low or other supportive setting as they become frailinterest rates, this decision will reduce an elder’s and in need of care. Without sufficient funds,hard-earned home equity. For homeowners some may need to turn to Medicaid to paywho only qualify for a subprime mortgage, for long-term care. When the reverse mortgagestretching payments over many years can end becomes due, borrowers or their heirs must payup costing more than twice as much as with the amount borrowed plus interest charges anda credit card.39 These additional expenses any service fees (see page 14 of The Essentials:can significantly deplete the already limited Reverse Mortgages).41 If the borrowers or heirsretirement resources of older adults with want to maintain ownership of the home, theymodest means. must repay all amounts due, even if those amounts are more than the value of the house.Using a reverse mortgage to defer debtpayments can also be risky. Borrowers who The current economic crisis heightens theuse loan funds early in their retirement may risk that older homeowners with modest orhave little home equity later in life. Borrowers fixed incomes will be unable to make monthlycontinue to accumulate interest payments on payments on their conventional home loans.the loan balance as long as they stay in their They may be better off with a reverse mortgage,homes. Those who continue to live in their since the risk of foreclosure is much lower withhomes for many years may find that they have these loans. However, the high transaction costs of reverse mortgages often deter older adults from selecting this loan. Costs at closing (origination fee, upfront mortgage insurance premium, appraisal, and other closing costs) are rarely folded into the interest rate, so they can be sizable, ranging from about $6,000 for a $100,000 home to over $16,000 for a $400,000 home. Among older adults who received counseling and decided not to take out a reverse mortgage, 63% were discouraged by up-front loan costs.41 Four states have developed programs that offer reverse mortgages at reduced cost. Montana and Connecticut have state-run and state- financed reverse mortgage programs that target older adults with modest incomes. New Jersey and Rhode Island offer reduced origination fees to borrowers who get a reverse mortgage. Policymakers should consider these and other incentives to make this option more affordable to lower- to middle-income families.24
  25. 25. ImplicationsThe proportion of older homeowners who usehome equity as a retirement resource is stillsmall. As a consequence, it is easy to overlookthis emerging trend. Although the indicatorsare faint, they are important because they serveto remind us that people are not complacentabout rising retirement risks. Americansare proud of their resourcefulness. Growingnumbers already use this asset to meet a widearray of unmet financial needs. These includemaintaining a steady flow of income, providinga financial buffer to cope with health andhomeowner expenses, and managing monthlycredit card and other consumer debt. As BabyBoomers enter retirement, millions of agingAmericans may soon turn to their homes aspart of their financial plans.These findings suggest that the financialservices industry, policymakers, and consumer study indicate that older adults rarely tap homeadvocates cannot ignore home equity in their equity to support basic consumption. Instead,efforts to promote retirement security. The they tend to use this asset to enhance theirhome is still the most important retirement ability to fill cash shortfalls and provide a bufferasset for many older homeowners, especially against cash flow shortages that may disruptfamilies with lower to middle incomes. Before the family budget. Home equity can play anthe housing bubble burst, people age 65 and important role to strengthen the capacityolder owned in total over $4 trillion in housing of older homeowners to cope with financialwealth.42 It will be useful to develop more uncertainties in later life. Small infusions ofaffordable solutions and effective public policy cash can also help older homeowners to remainfor older homeowners, since the decisions that flexible and adaptive, and to respondthey make about this valuable asset will have to problems while they are still manageable.long-term ramifications for their well-being,and for our nation. The idea of using home equity to increase financial resilience is a concept that isNeed for Financial Flexibility only beginning to receive attention fromAmericans in or nearing retirement are the financial services industry. Financialconcerned about economic fluctuations that professionals who focus on asset accumulationcan affect their well-being as they grow older. still encourage older homeowners to preserveAs a result, homeowners are looking for new housing wealth. However, for those who arestrategies to increase their flexibility to respond unable to save enough to ensure a secureto changing financial needs. The findings of this retirement, they may need to use home equity TAPPING HOME EQUITY IN RETIREMENT 25
  26. 26. Implicationsas more than just a last resort. In this changing ›  Address changes over the life course— retirement landscape, financial professionals Advice and solutions that include homeshould re-examine the role of housing wealth as equity need to take into consideration howan integral part of financial risk management. financial, health, and family needs and risks change as people grow older.Homeowners who tap home equity earlier inretirement will likely face new and potentially ›  Offer solutions that strengthen financial unanticipated risks. Additional research will security—A house is more than a financialbe required to assess the changing needs asset; it is also a home. Older homeownersand vulnerabilities of older homeowners, across the economic spectrum are lookingand the suitability of different financial for cost-effective options that can give themsolutions. To support these efforts, and to peace of mind.monitor lending trends to older adults, theFederal Reserve Board should expand Home These guiding principles provide a foundationMortgage Disclosure Act (HMDA) reporting upon which to develop loan products and publicrequirements by adding variables on the age policy that can better serve aging homeowners.of the borrower and co-borrower. Such timely Greater focus on these issues can also serve asdata can also help to ensure that consumer a framework for strengthening ties betweenprotections for older homeowners keep pace experts from many different disciplines thatwith the evolving home mortgage marketplace. seek to improve the quality of life for older homeowners.Guiding PrinciplesThe findings of this study suggest that home Partnering to Promote Innovationequity will not offer a simple solution to As Americans increasingly rely on home equitythe growing financial problems of aging to manage cash flow in retirement, they willAmericans. The diverse needs and expectations be looking for additional advice and effectiveof older homeowners also highlight the need tools. Meeting this challenge opens the doorto strengthen retirement planning strategies to a wide array of collaborative efforts. Thebeyond simple models of asset accumulation financial services industry professionals canand decumulation. The following principles work with consumer advocates to strengthenoffer guidelines that can aid the development financial literacy programs for homeowners atof a more comprehensive approach to financial all ages. As the number and complexity of thesecurity in later life: options grow, older workers and retirees will need more sophisticated decision-support tools.›  Use a holistic, person-centered framework— Additional advice will be important for lower- Strategies need to shift from product-focused and middle-income families who have not approaches to comprehensive financial plans traditionally used financial planning services. that include home equity as an integral part of retirement security. Organizations that offer debt management, reverse mortgage counseling, and benefits›  Promote flexibility—Older homeowners counseling should work together to help older need multiple, affordable products that can Americans understand their options. As trusted meet both long- and short-term financial community resources, Area Agencies on Aging goals in retirement. and Aging and Disability Resource Centers can26
  27. 27. help older homeowners combine home equity When they face a financial shortfall today,with assistance from public programs to help aging Americans turn to familiar solutionsthem stay home longer. These agencies can also such as credit cards or conventional loans thatfacilitate the transition from the home to other offer few consumer protections. These findingsliving arrangements. To support these efforts, suggest a growing need for more flexible andit will be important that mandatory reverse affordable home loans. Before the crash of themortgage counseling programs keep pace with housing market, lenders were developing manythe growing interest in these loans. new proprietary reverse mortgage products for affluent homeowners. By working together, theFor many Americans, out-of-pocket health financial services industry, HUD, and agingand long-term care expenses represent their organizations may be able to accelerate thegreatest uncovered financial risk in retirement. development and testing of reverse mortgagesOrganizations that serve older adults need and other financial products that are designedto work together with the financial services to meet the needs of homeowners with modestindustry to promote the development of housing wealth.cost-effective loan products and innovativeprograms that can help impaired older Solving everyday financial problems ishomeowners meet this growing challenge. becoming increasingly complex and difficultIt will also be important to conduct in later life. Although there are still manydemonstration projects that test different unanswered questions, the financial servicesmodels for using home equity. In our aging industry, policymakers, and consumersociety, it is still too early to say which solutions advocates cannot be complacent about themay work best to enhance financial security potential benefits and risks of using this asset tofor different segments of the older adult address the challenges facing older Americans.population. Americans should also considerat an earlier age how they will pay for potentiallong-term care expenses.As part of this effort, federal and statepolicymakers will want to consider the needsand resources of older homeowners as theydevelop new programs and public policy tofinance long-term care. Home equity can bean important new source of funds to pay forearly interventions that can reduce the needfor costly nursing home care. To supplementtax deductions for mortgage payments,policymakers might consider offeringgovernment incentives to lower the cost ofreverse mortgages to help financially vulnerableolder adults continue to live at home. Marriedcouples may need additional protections tomake sure that one spouse does not becomeimpoverished if they tap home equity to pay forthe health or long-term care needs of the other. TAPPING HOME EQUITY IN RETIREMENT 27
  28. 28. Endnotes 1 Ernst Young (2007). The New Frontier of 11 Schiller, J.S., Kramarow, E.A., and Dey, A.N. (2007). Retirement Cash Flow Management. Fall Injury Episodes Among Noninstitutionalized Older Adults: United States 2001-2003. CDC Advance Data 2 Zillow.com (2009). Americans lose $1.4 trillion from Vital and Health Statistics. Report No. 392. in home values in Q4; More than was lost in all of 2007. Press release available at: http://zillow. 12 National Center for Health Statistics (2009). Health, mediaroom.com/index.php?s=159item=103. United States, 2008. Hyattsville, MD: NCHS. 3 National Association of Realtors (2009). Median 13 Sass, S.A., Sun, W., and Webb, A. (2008). When sales prices of existing single-family homes for Should Married Men Claim Social Security Benefits? metropolitan areas. Quarterly Report — Single Center for Retirement Research at Boston College, Family 4th Quarter 2008. Fact sheet available Issue in Brief 8-4. at: http://www.realtor.org/wps/wcm/connect/ 14 VanDerhei, J. (2009). The Impact of the Recent a0a78e804d0074afa729ef8d0a12d865/REL08Q4T.pdf?M Financial Crisis on 401(k) Account Balances. OD=AJPERESCACHEID=a0a78e804d0074afa729ef8d EBRI Issue Brief 326. 0a12d865. 15 See: Kutty, N. (1998). The scope for poverty 4 U.S. Census Bureau (2008). American Housing alleviation among elderly homeowners in the Survey for the United States: 2007. Current Housing United States through reverse mortgages. Urban Reports, Series H150/07. Washington, DC: U.S. Studies 35 (1): 113-29; Zedlewski, S., Cushing- Government Printing Office. Daniels, B., and Lewis, E. (2008). How much 5 Data from the American Housing Survey for the could reverse mortgages contribute to retirement United States, 1999 and 2007. incomes? Retirement Policy Program Brief Series No. 23. Washington, DC: Urban Institute.; Mayer, 6 The low income value ($20,000) used in this analysis C.J. and Simons, K.V. (2003). Reverse mortgages is about 200% of the federal poverty level (FPL) for and the liquidity of housing wealth. Real Estate a single person in 2007 ($20,420). The high income Economics 22(2): 235 – 255. value ($40,000) is close to 400% of the FPL for singles ($40,840) or 300% of the FPL ($41,070) 16 Zedlewski, et al. (2008). for couples. 17 Eschtruth, A.D., Sun, W., and Webb, A. (2006). 7 The upper level for home value used in this analysis Will Reverse Mortgages Rescue the Baby Boomers? ($250,000) was selected to reflect the average value Boston, MA: Retirement Research Center at Boston of homes owned by reverse mortgage (HECM) College; VanDerhei, J. and Copeland, C. (2003). borrowers, which was $262,000 in 2007 and Can America Afford Tomorrow’s Retirees: Results $239,000 in 2008. Source: HUD (2009). Total From the EBRI-ERF Retirement Security Projection HECM Cases Endorsed for Insurance by Fiscal Year Model. Washington, DC: Employee Benefit of Endorsement Plus Selected Loan and Borrower Research Institute, Issue Brief 263. Characteristics, available at: http://www.hud.gov/ 18 Stucki, B. (2005). Use Your Home to Stay at Home. offices/hsg/comp/rpts/hecm/hecm0209.xls. Washington, DC: National Council on Aging. 8 Meschede, T., Shapiro, T.M., and Wheary, J. (2009). 19 Coile, C. and Milligan, K. (2006). How Household Living on Less. Waltham, MA and New York, NY: Portfolios Evolve After Retirement: The Effect of Institute on Assets and Social Policy at Brandeis Aging and Health Shocks; Lee, J. and Kim, H. University, and Demos. (2003). An examination of the impact of health on 9 Munnell, A.H., Soto, M., and Aubry, J-P. (2007). wealth depletion in elderly individuals. Journal of Do People Plan to Tap Their Home Equity in Gerontology: Social Sciences 58(2): S120–S126. Retirement? Boston, MA: Retirement Research 20 French, E., De Nardi, M., Jones, J.B., Baker, O., Center at Boston College. and Doctor, P. (2006). Right Before the End: Asset 10 MetLife Mature Market Institute (2008). Feeling the Decumulation at the End of Life. Federal Reserve Economic Pinch. Westport, CT: MetLife. Bank of Chicago Economic Perspectives Q3: 2-13.28

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