I was sitting in my hotel room overlooking the city of Nanchang, in southeast China. From 250 feet up, much of the city’s skyline was within my view. Of course, homeownership is quite different in mainland China, but I couldn’t help but wonder, in a city of more than 5 million people, how many of the elderly live in these massive high-rise buildings as far as the eye can see? Are they as ill-prepared for retirement as we are in the States? How did the one-child policy impact retirement planning in a culture that almost exclusively relies on the young to provide for the old?
Like many reverse mortgage professionals, it doesn’t take long before my mind drifts to home equity conversion. What other countries have reverse mortgages? What are they called there? Do the media and the public in these countries misunderstand the intent of their programs as well? Do they face the same challenges we face?
I found that what we call a Home Equity Conversion Mortgage or a reverse mortgage in the United States is often labeled as “equity release” overseas. However, equity release is a broad category of financial products, and it can have multiple meanings.
For example, in America it is rare to see mortgage products in which the homeowner sells, or gives up title to, their home. As reverse mortgage professionals, we have to constantly reassure homeowners that with the HECM product, the homeowner retains title and ownership of the home over the life of the loan. With a HECM, the estate has the ability to sell or refinance the home upon the borrower’s death. In several other countries, giving up ownership is the expressed purpose of their equity release program. These are often called “home reversion schemes.” While we would object to the use of the word “scheme,” it doesn’t have the same negative connotation abroad. Home reversion is simply another form of equity release.
As I researched foreign reverse mortgage plans, I found much of the information conflicting. Is it possible reverse mortgage programs around the world change as frequently as ours? The following is my best attempt to describe international home equity conversion.
As it turns out, I’m not the only one curious enough to research the world in reverse. Financial blogger Martin Andelman explored the topic of international reverse mortgages in his 2014 article titled “Views on Reverse Mortgages from Around the World.” Andelman discusses the Canadian Home Income Plan (CHIP), noting that rampant misinformation in America convinced Canadians to change their marketing of the product. In fact, while promoting CHIP, the Seniors’ Lending Centre even warns homeowners about Internet searches that could mislead them. “When doing your research,” the Centre warns, “be sure you are reading about the Canadian experience.”
Fifty-five seems to be a magic number for CHIPs, as that is not only the minimum age, it is also the maximum principal limit factor percentage—up to 55 percent of the home’s value.
While Hong Kong is technically an administrative region of the People’s Republic of China, it operates as an autonomous territory. Its Reverse Mortgage Programme was introduced in 2011 and appears to be similar to the HECM product. However, like many international equity release programs, the payouts received by the homeowner tend to be structured in term payouts, similar to those of a forward mortgage (10, 15 or 20 years). And, like the Canadian product, it is offered only to those 55 and older.
The Hong Kong Mortgage Corporation encourages banks to offer the reverse mortgage product by acting as the insurer in the way FHA covers any shortfall when a HECM loan matures.
The population in Hong Kong is aging, just as it is here in the States, and more people are now exploring the product and learning how it works. It appears their educational efforts have paid off, as the Reverse Mortgage Programme is gaining traction.
The British call it a “lifetime mortgage” or “equity release,” and once again, the product is available to homeowners 55 and older. One notable—and attractive—difference is the ability to protect, or set aside, a portion of one’s home value as an inheritance for family members.
Like many foreign products, principal limits are low in the U.K. when compared with our HECM product. Principal limit factors are 25 to 30 percent at age 65, with a maximum of 50 percent for older homeowners. However, the lifetime mortgage may provide higher factors based on the homeowner’s specific medical diagnosis.
The U.K.’s industry association is called the Equity Release Council (formerly known as Safe Home Income Plans, or SHIP). The council aims to make sure that the various products are safe, and member firms sign a Statement of Principles similar to our NRMLA Code of Ethics.
While we have become accustomed to explaining the non-recourse feature of the HECM product, most lifetime mortgages offer a more aptly named protection called “the no-negative-equity guarantee.”
Banks in New Zealand offer reverse mortgage products known as Home Equity Release (HER). While products vary in term and name (there’s one called the Advance Loan), generally, one must be 65 to qualify. New Zealand’s Ministry of Social Development provides a code of standard for offering equity release loans for member firms, but to my knowledge, banking membership only includes Heartland, HSBC and SBS.
Heartland Bank partnered with U.S.-based Reverse Focus in a consulting agreement in September 2015. Reverse Focus’ efforts helped the New Zealand bank increase production and streamline operations and sales methodologies for its HER product. Reverse Focus president Shannon Hicks notes, “Consulting with Heartland was a rewarding experience as they faced similar hurdles to the ones our industry overcame in the U.S. in the early days of reverse mortgage lending.”
“The key role that home equity plays in retirement crosses borders and cultures. We are pleased to see the opportunity New Zealand seniors have to access their equity,” adds Hicks.
New Zealand’s neighbor, the land Down Under, also offers equity release products, and the reverse mortgage is one that has gained popularity. There are various product names, with one bank offering an “Equity Unlock Loan.” That product and others are monitored through their industry trade association called the Senior Australians Equity Release Association of Lenders (SEQUAL).
As is the case with other countries, Australian homeowners have the option to maintain full ownership of their home with a reverse mortgage, or they can participate in a Home Reversion, which is a form of Shared Sale Agreement.
According to SEQUAL, the Shared Sales Agreement “gives the senior homeowner a cash amount today in return for selling an agreed share of the future proceeds from the sale of their home.” Alternatively, the reverse mortgage is more closely aligned with HECM guidelines, and customers have the protection of a no-negative-equity guarantee under federal law.
According to a 2013 Bloomberg report, many older Koreans began obtaining reverse mortgages as a hedge against property value declines. In Korea, they call them JooTaekYeonKeum, which translates to “housing pension.” Their reverse mortgage program has grown rapidly since its introduction in 2007.
Housing pensions are insured by the Korea Housing Finance Corporation and the program requires homeowners to be at least 60 years old and to have paid off their home.
Shannon Hicks reported on the progress of Korea’s reverse mortgage program this spring, noting, “What is unique is that unlike the U.S., the South Korean government is taking proactive steps to promote the loan product.” He continues, “While the U.S. may be the frontrunner in creating the reverse mortgage, our government remains reluctant to advocate the loan.”
India is one of several countries where the reverse mortgage faces cultural challenges. To Indians, the home is more than an investment; it is a family-owned asset. Every effort is made to preserve that asset for future generations.
Nevertheless, reverse mortgages are offered for individual homeowners age 60 and older, or a co-applicant spouse who may be younger. Also, the subject property must have at least 20 years of life left. In addition, most reverse mortgages in India are structured for a fixed period of 10 to 20 years with relatively low payouts. As such, there has always been a concern about outliving the funds. One solution to this problem is called a reverse mortgage loan enabled annuity, which allows a homeowner to receive a lifetime annuity.
As it turns out, mainland China has been attempting to answer some of my questions with a form of reverse mortgage called “House-for-Pension.” Existing traditional pensions in China are insufficient in the same way our Social Security now replaces less of our needed income during retirement.
But China is experiencing an aging crisis that is quite extreme when compared with our crisis with the baby boomer generation. It’s not simply their increased longevity and massive numbers (more than 200 million Chinese are over age 65). Their predicament is complicated by a diminished younger generation that is culturally obligated to take care of their elders.
In addition, the one-child policy in China created what some call the 4-2-1 crisis: four grandparents and two parents being supported by one child.
So, on one hand, the reverse mortgage is a perfect fit for millions of homeowners without a sufficient pension or without children to support them. In addition, for those with no children, there is no bequest incentive, and the future ownership of the property is of little concern. However, the Chinese culture is one that greatly values the home as a bequest to one’s child. This may be the country’s largest hurdle.
China is actually in its third attempt at rolling out a successful reverse mortgage program. The first, in 2006, was a government-run “house-for-pension” plan. The second, in 2011, was a program offered through banks, but it was slow to catch on. This third attempt is being offered through insurance companies and is more closely related to the HECM. The homeowners must be 60-85 years old and reside in cities approved for this pilot program: Beijing, Shanghai, Guangzhou or Wuhan.
When I offered to write this article, my intention was to interview Mr. Edward Szymanoski, an original architect of the HECM program and international ambassador for the reverse mortgage. Sadly, he passed away this spring, and the world lost a great advocate for the product. His work still impacts the HECM program as well as equity release programs abroad.
While my list of international equity release programs isn’t complete, the common thread was recognizable as I researched each one: The HECM program is referenced as the catalyst for products assisting older homeowners internationally. We are the innovators, and older homeowners worldwide have benefited from our example.