Momentum continues to build around reverse mortgages and related products. Persistent growth in both home prices and the senior population has stoked renewed interest and discussion about the most appropriate uses of accumulated home equity in financial planning strategies. A common and superficial way to think of reverse mortgages is as a “last-resort” means of covering expenses when more conventional planning tools prove insufficient. But experts increasingly are not thinking of reverse mortgages in this way. Last week, the American College of Financial Services and the Bipartisan Policy Center hosted the 2018 Housing Wealth in Retirement Symposium. Speakers represented policy research think tanks, institutional asset managers, large banks, and AARP. Notwithstanding the diversity of viewpoints, virtually every speaker reiterated a position that financial planners have posited for years: financial products that leverage home equity should, in many cases, be integrated into comprehensive retirement planning strategies, rather than being reserved as a product of last resort.
Senior Home Equity Continues Trending Upward
The National Reverse Mortgage Lenders Association (NRMLA) and RiskSpan have published the Reverse Mortgage Market Index (RMMI) since the beginning of 2000. The RMMI provides a trending measure of home equity of U.S. homeowners age 62 and older. The RMMI defines senior home equity as the difference between the aggregate value of homes owned and occupied by seniors and the aggregate mortgage balance secured by those homes. This measure enables the RMMI to help gauge the potential market size of those who may be qualified for a reverse mortgage product. The chart below illustrates the steady increase in this index since the end of the 2008 recession. It reached its latest all-time high in the most recent quarter (Q4 2017). Increasing house prices drive this trend, mitigated to some extent by a corresponding modest increase in mortgage debt held by seniors. The most recent RMMI report is published on NRMLA’s website. As summarized below by the Urban Institute, home equity can be extracted through many mechanisms, primarily Federal Housing Administration (FHA)–insured Home Equity Conversion Mortgages (HECMs), closed-end home equity loans, home equity lines of credit (HELOCs), and cash-out refinancing.
Share of Homeowners Who Extracted Home Equity by Strategy
The Urban Institute research goes on to point out that although few seniors have extracted home equity to date, the market is potentially very large (as reflected by the RMMI index) and more extraction is likely in the years ahead as the senior population both grows and ages. The data in the following chart confirm what one might reasonably expect—that younger seniors are more likely to have existing mortgages than older seniors.
Reverse Mortgage as Retirement Planning Tool
Looking at senior home equity in the context of overall net worth lends support to financial planners’ view of products like reverse mortgages as more than something on which to fall back as a last resort. The first three rows of data in the table below contains the median net worth by age cohort in 2013 and 2016, respectively, from Federal Reserve Board’s Survey of Consumer Finances. The bottom row, highlighted in yellow, is the estimated average senior home equity (total senior home equity as computed by the RMMI divided by senior population) for the same years. We acknowledge the imprecision inherent in this comparison due to the statistical method used (median vs. average) and certain data limitations on RMMI (addressed below). Additionally, the net worth figures may include non-homeowners. Nonetheless, home equity is an unignorably important component of senior net worth.
Following the release of the Federal Reserve’s 2016 Survey of Consumer Finances https://www.federalreserve.gov/econres/scfindex.htm, the Urban Institute published a summary research paper “What the 2016 Survey of Consumer Finances Tells Us about Senior Homeowners” https://www.urban.org/sites/default/files/publication/94526/what-the-2016-survey-of-consumer-finances-tells-us-about-senior-homeowners.pdf in November 2017. The paper notes that “Worries about retirement security are rooted in several factors, such as Social Security changes that shrink the share of preretirement earnings replaced by the program (Munnell and Sundén 2005), rising medical and long-term care costs (Johnson and Mommaerts 2009, 2010), student loan burdens, and the shift from employer-sponsored defined-benefit pension plans that guarantee lifetime income to 401(k)-type defined-contribution plans whose account balances depend on employee contributions and uncertain investment returns (Munnell 2014; Munnell and Sundén 2005). In addition, increased life expectancies require retirement savings to last longer.”
The financial position of seniors is evolving. Forty-one percent of homeowners age 65 and older now have a mortgage on their primary residence, compared with just 21 percent in 1989, and the median outstanding debt has risen from $16,793 to $72,000, according to the Urban Institute. As more households enter retirement with more debt, a growing number will likely tap into their home as a source of income. Hurdles and challenges remain, however, and education will play an important role in fostering responsible use of reverse mortgage products.
Note on the Limitations of RMMI
To calculate the RMMI, an econometric tool is developed to estimate senior housing value, senior mortgage level, and senior equity using data gathered from various public resources such as American Community Survey (ACS), Federal Reserve Flow of Funds (Z.1), and FHFA housing price indexes (HPI). The RMMI is simply the senior equity level at time of measure relative to that of the base quarter in 2000.[1] The main limitation of RMMI is non-consecutive data, such as census population. We use a smoothing approach to estimate data in between the observable periods and continue to look for ways to improve our methodology and find more robust data to improve the precision of the results. Until then, the RMMI and its relative metrics (values, mortgages, home equities) are best analyzed at a trending macro level, rather than at more granular levels, such as MSA.
[1] There was a change in RMMI methodology in Q3 2015 mainly to calibrate senior homeowner population and senior housing values observed in 2013 American Community Survey (ACS).
