As the director of the Center for Retirement Research at Boston College, Alicia Munnell is widely recognized as an authority when it comes to the economics of aging. With an M.A. from Boston University and a Ph.D. from Harvard, Munnell began her career as an economist for the Federal Reserve Bank of Boston, where she spent 20 years before moving on to serve as assistant secretary of the Treasury for economic policy. In 1995 Munnell joined the President’s Council of Economic Advisers, where she worked for two years before joining Boston College to teach at the Carroll School of Management and lead the university’s acclaimed Center for Retirement Research.
Munnell has been a longtime proponent of the HECM program, regularly citing her belief that reverse mortgages will one day be a commonplace financial tool used by seniors to fund retirement. Munnell spoke with TRR about the benefits of reverse mortgages and her hopes for the future of the program.
JG: You’ve been outspoken in your support of the reverse mortgage product. Why do you think it can be an important tool for seniors looking for financial security in retirement?
AM: I consider the reverse mortgage in the context of everything else that is going on in the retirement space. In that world, we see that Social Security is going to provide less relative to pre-retirement earnings. We see a shift in reliance from defined contribution plans. And when we look at defined contribution plans, we find that for people approaching retirement, their households have only $120,000 in their combined 401(k) and individual IRA accounts… People are just not going to have enough money to maintain their standard of living in retirement. So that forces you to look at what other assets they have, whatever potential sources of support. For most middle-class individuals, their house is their biggest asset. So the question is, “How can they tap into that money?” The reverse mortgage is an obvious instrument for those who want to stay in their house and have additional income during their retirement period.
JG: You wrote an article in response to the CFPB’s Reverse Mortgage Report last year that refuted some of the agency’s findings and seemed to accurately summarize the views of many in the reverse industry. In particular, you criticized the media for running salacious headlines and failing to pick up on the details of the report. Do you think that those negative media headlines impacted the industry to any significant degree?
AM: Yes, I do. I think that there is a drumbeat of negative reports. I think a lot of this new agency, I’m delighted we have it, but this report was just one more hit. And this one seemed to come from a very reliable source concerned about the welfare of households. And so I thought it was important to answer the concerns expressed in the report. But more importantly, the press made the report sound even more negative than it was. It raised some legitimate issues and there was a much more nuanced discussion than we saw reported in the press.
JG: As a result of that report and of the recent audit of the Mutual Mortgage Insurance Fund, the CFPB has promised to make changes to the program. Are there any changes you would like to see made in order to make the product safer for consumers?
AM: I think there are some obvious things. These products need to be sold very carefully. They’re complicated and they’re expensive, and I think they have to be in some sense, because you’re giving people money upfront and then saying 20 or 30 years from now, “I the lender will be repaid,” assuming a lot of things. And so, it’s a risky business. Given that it is expensive by nature, it needs to be sold to the right people and people need to understand the risks. And I think spouses need to be fully informed and tied sales need to be prohibited. So there are all these things that you want to do to make this a reputable product that people are proud to use.
JG: Why do you think the product is so often misunderstood?
AM: In some ways it’s nature. It’s sort of taking away the wealth of older people. People are going back and they’re remortgaging the house that they just contributed to paying off over their entire working life. So they’re saying, “I’m going to give up my house for some money in retirement.” That’s sort of a painful thing to do. I think it’s economically necessary, but boy, all the evidence to date shows that it’s not something that people want to do if they don’t have to do it. All the surveys show that people retain their home equity until late in retirement unless they have some action that forces them to leave it to their estate. So, it’s painful to say that you need to use your house to support yourself. And then, it seems like if there are any incidences of mis-selling, they get enormous publicity and they are not put in context.
JG: The product has had a low penetration rate thus far, just about 3 percent of the potential borrower market. What do you think the industry can do to turn that around?
AM: I think the evolving trends are going to turn it around. The people who are retired today retired when Social Security’s normal retirement age was 65, and a lot of them have defined benefit plans. We’re watching a transition here to a situation where new retirees are going to have reduced Social Security, because the retirement age is going out. And so I think just the economics of need are going to increase the demand for reverse mortgages.
JG: Do you expect this product to be much more commonplace in the future?
AM: I do think it will become more commonplace. I would like to see it become normalized to the point where people in their early 60s will go out for dinner and say, “Now, where did you get your reverse mortgage?” It would be the natural, normal thing to do. In economics, a lot of studies observe neighborhood effects. I don’t know where the tipping point is, where people start to see enough other people doing it that it becomes the social norm, but I think that is how it’s going to happen. I think economic pressures on individual households will cause the market to increase, and so it’s very, very important that, as the demand for these products increases, they are sold to the right people and that the industry polices itself to make sure there are still ethical procedures going on.
JG: I understand that you’re a board member and investor in Longbridge Financial. What encouraged you to get involved?
AM: Yes. I’m not rich. I’ve spent my whole life not getting rich and I don’t think I’m going to get rich here. But I am an investor. I put a bit of money in and it’s the only time I’ve ever done it in my life. It reflects the fact that I am so convinced that this is a product people are going to need. And also, I’m convinced that Longbridge is dedicated to selling these products in a socially responsible way. So I’m very excited about this, my little private equity investment.
JG: What do you think is the reverse mortgage industry’s greatest challenge?
AM: I think right now it’s image. I think that it needs to shift this image of an industry that tricks older people into giving up their homes and then once they get some money, forces them to buy into expensive annuities. It needs to get away from this misdealing and there needs to be an industry group that says we’re a good new industry and all those bad things happened in the past. So in some ways, we need to wipe the slate clean and establish standards that everybody signs on to, increase trust in the product and the people who sell the product.
JG: What are your hopes for the direction of the program?
AM: I think it should become a social norm, a default thing that older people do when they’re thinking about retirement. They sign up for Social Security, they sign up for Medicare, they get a reverse mortgage on their house. I think they’re going to need to do it and I think that it will become, eventually, a socially acceptable, normal thing to do. I think we haven’t really thought enough as researchers about ways to use reverse mortgages. And this came up in the context of the CFPB report, this notion that people get them young. In my view, that might be a good thing, because I am very big on people deferring claiming their Social Security benefits, because of the great advantage to getting this inflation index annuity at a later age. So, if your house can help you get from 62 to 70, that may be a very good way to use a reverse mortgage. There hasn’t been enough study on different ways to use this product. I think it could be used very intelligently at a younger age.