The Great Recession may eventually lead to more use of reverse mortgages, but, today, worries about long-term care (LTC) bills have effects that mostly cancel each other out.
Two economists — Makoto Nakajima of the Federal Reserve Bank of Philadelphia and Irina Telyukova of the University of California-San Diego — have included those observations in a working paper on a mystery that has long puzzled LTC planners: The relatively small size of the U.S. reverse mortgage market.
In the United States, a reverse mortgage is a loan that homeowners over the age of 62 can use to get cash backed by the value of their homes without selling their homes. If a couple owns the home, the couple must pay back the loan when both spouses have moved out, or died. Any remaining equity ends up in the couple’s estate.
A little less than 10 years ago, when the world was young and U.S. housing prices were high, the National Council on Aging published a report in which an author suggested that older Americans could use reverse mortgages to pay about $3 billion to $5 billion in nursing home bills in 2010 alone.
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At this point, it seems unlikely that consumers are using reverse mortgages to pay billions of dollars in nursing home or home care bills. Some LTC planners have successfully included advice about use of reverse mortgages on their shelf of LTC funding tools. Mike Patton reported in May that a private real estate investment trust (REIT), Reverse Mortgage Investment Trust, had recently geared up for a reverse mortgage market recovery by raising $230 million.
Other LTC planners have not seen much actual use of reverse mortgages in LTC finance in the wild.
The Great Recession hit home equity, homeowners and federal mortgage finance agencies hard. The Federal Housing Administration, for example, tightened its reverse mortgage program rules after finding that it was losing $2.8 billion in its $88 billion reverse mortgage portfolio.
Researchers at Harvard’s Joint Center for Housing Studies found that only 55,000 took out reverse mortgages through the federal Home Equity Conversion Mortgage (HECM) program in 2012, down from 114,600 a few years earlier.
Nakajima and Telyukova said the latest penetration data they could find, for 2011, showed that only 2.1 percent of eligible U.S. homeowners had reverse mortgage loans.
Why are so few homeowners using reverse mortgage loans to pay LTC bills and other bills?
One observation the economists make is that use of reverse mortgages is actually more common among some groups of older consumers: Among the eligible homeowners in the lowest fifth in terms of income, for example, the take-up rate is 5.5 percent, and the take-up rate is about 17 percent for low-income householders with heads aged 90 and older.
Here are four other ideas drawn from the economists’ paper:
1. Taking out a reverse mortgage loan is difficult.
The economists made additions to older models for reverse mortgage loan demand and found that theirs seemed to do a better job of predicting real-world loan volume.
Their model shows that the changes the FHA made in 2013 will, by themselves, all other factors being equal, reduce demand for reverse mortgages by 60 percent.