The American population is getting older every year. By 2030, there will be nearly 73 million Americans aged 65 or above and nearly nine million who are 85 or older. An overwhelming majority of these seniors will seek to remain in their own homes and communities and “age in place.”
For many seniors, aging in place can provide significant emotional, social, and economic benefits. Seniors who age in place welcome the emotional security of knowing they will remain supported by the same connections to family, friends, and community that have enriched their lives over many decades. They take comfort in the fact that they are familiar with their external social environment – the local park, pharmacy, grocery store, and post office. And aging in place can be the most financially sensible housing option for those seniors who have the physical capacity to stay at home.
Unfortunately, many of our homes were designed at an earlier time and lack the structural features and support systems that can make independent living into one’s senior years a viable, safe option. Designing new homes (both owned and rental) with “senior friendly” features, as well as remodeling existing ones, is a major challenge likely to grow in importance as more and more Baby Boomers enter their retirement years.
In some instances, one financial tool that has the potential to assist seniors in fulfilling their desire to age in place is the reverse mortgage. For many seniors who have spent years making monthly mortgage payments, their home is their single most valuable asset. In 2009, half of homeowners aged 62 and older had at least 55 percent of their net worth tied up in home equity. Currently, reverse mortgages allow senior homeowners to tap into this equity and defer payment of the loan until they pass way, move, or sell their house.
Today, the Federal Housing Administration (FHA) insures virtually all reverse mortgages through its Home Equity Conversion Mortgage (HECM) program. (As of November 2011, there were nearly 600,000 HECM loans outstanding.) Unfortunately, a recent actuarial review exposed the program’s significant financial shortcomings. In response, the FHA has made a number of administrative changes to shore up the HECM program, including reducing the amount borrowers are permitted to draw at the time of loan origination. But FHA currently lacks the statutory authority to act quickly and make the broader changes necessary to strengthen the program’s financial position.
Fortunately, the U.S. House of Representatives recently passed legislation – the Reverse Mortgage Stabilization Act of 2013 sponsored by Representative Denny Heck (D-WA) and Representative Michael Fitzpatrick (R-PA) – that gives FHA the power to make program changes by mortgagee letter, rather than through the complex and often lengthy rulemaking process, when necessary to improve the fiscal situation of the HECM portfolio. This portfolio is particularly sensitive to changing market conditions, so giving FHA the flexibility to make changes expeditiously is vital. In the Senate, Senator Bob Menendez (D-NJ) has introduced similar legislation.
Another concern is education around these products. In a 2012 report to Congress, the Consumer Financial Protection Bureau concludes that few consumers fully understand the financial mechanics of reverse mortgages. In addition, the report warns that increasingly complex product choices in the reverse mortgage market were making it more difficult for housing counselors to provide effective guidance to their clients.
Today, the market for reverse mortgages is small, with only about 70,000 new reverse mortgages originated annually. But as more and more Americans enter their senior years, reverse mortgages could play a larger role in meeting the financial needs of older adults, particularly those seeking to age in place. Access to low-cost and effective reverse mortgage counseling is therefore essential to fully inform seniors about the risks and benefits of these products.
The desire of millions of seniors to age in place is already a significant, and growing challenge, facing our country. It is time we develop a commensurate policy response.
Former Housing and Urban Development Secretary Henry Cisneros serves as a co-chair of BPC's Housing Commission.