Retirees could improve their financial security by liquidating a portion of their home equity, but a whopping 80 percent of seniors over 55 say they have no interest in doing so. A new study released by the Urban Institute, a think tank based in Washington, D.C., sets out to explain why.
Published in February, “Seniors’ Access to Home Equity: Identifying Existing Mechanisms and Impediments to Broader Adoption,” takes a look at why such a large percentage of seniors are unwilling to utilize what may be their greatest asset and assesses what can be done about it.
Authors Karan Kaul and Laurie Goodman, of the institute’s Housing Policy Finance Center, explain that part of the problem is that most seniors fail to consider strategic uses of this resource, and often don’t consider tapping it unless disaster strikes. “Few retirees tap into home equity, and most who do typically wait until they experience a serious financial shock, such as substantial medical expenses or the death of a spouse,” they write.
Why are so many unwilling to consider equity? Goodman and Kaul say that some of the impediments are behavioral and “have to do with seniors’ long-held values, beliefs, and attitudes,” while others may be rooted in fear or stem from issues with product flaws.
The study highlights several reasons why seniors don't utilize their home equity:
-A general trend toward financial conservatism and a desire to avoid debt in old age
-A desire to leave a bequest
-A desire to save equity as a last resort for emergency expenses or long-term care costs
-Fear of losing their home
-The ability to work longer has reduced the need to depend on debt
-Poor financial literacy
-Product complexity and cost
-Fear of scams, particularly with reverse mortgages
The study extracts data results from Fannie Mae’s National Homeownership Survey. It points out that 47 percent of respondents said they would prefer to sell or downsize before using their equity, while 16 percent said they would prefer a home equity loan or line of credit. Just 6 percent said they would prefer a reverse mortgage.
But while nearly half said they would prefer to sell or downsize, 65 percent said they “never” expect to move in retirement. The authors speculate that “one possible explanation for the contradiction is that seniors’ desire to avoid debt might be stronger than their desire to age in place. In other words, seniors may prefer to age in place only if it does not involve borrowing.”
When asked how familiar they are with reverse mortgages, 43 percent selected either “none of the above,” “don’t know” or “other,” leading the authors to conclude that the “unusually large proportion of uncommitted responses is perhaps a reflection of how poorly understood reverse mortgages are.”
Part of the problem, the authors state, lies in advertising. “Misleading and aggressive advertising often make it difficult for seniors to understand reverse mortgages holistically,” they write.
Another issue is the lack of recognizable lenders in the reverse market. “Consumers worried about getting scammed are more likely to choose brand-name lenders over others that are not well known, making reverse mortgages an even tougher sell in the current environment,” they write.
To promote the smart use of home equity in retirement, the authors make several suggestions. The first is to improve the public’s understanding of reverse mortgages by promoting discussion of the product among younger individuals, which they suggest can be done by incorporating housing wealth and reverse mortgages into retirement planning and improving outreach and education through HUD and the Social Security Administration. They also suggest providing different types of counseling for different classes of borrowers.
The authors also point to the fact that part of the problem is symptomatic of HECM product flaws. They suggest simplifying product design by eliminating rarely used features and simplifying the line-of-credit disbursement option. They also note that increased competition among lenders would drive down marketing costs, reducing the expense to the borrower. Increasing HMBS liquidity would be another way to lower the cost of the product. The authors suggest increasing the investor base by educating foreign investors, sovereign funds and other fixed-income investors on how HMBS can be a solid alternative to U.S. Treasury securities. “HECM mortgage-backed securities also have yield, prepayment, and maturity profiles different from those of forward mortgage-backed securities,” the authors write. “In that sense, HMBS could also offer a valuable diversification opportunity to investors.” Finally, the study recommends reintroducing a modified version of the HECM Saver, which it says could “expand credit availability for low- and moderate-income borrowers without necessarily exposing HUD or lenders to greater risk.”
In its 53 pages, the study offers insight into why most seniors are unwilling to consider tapping their home equity in retirement in a way it calls “easy, efficient and economical.” While it says that some of these barriers can be addressed through product tweaks, regulation and policy change, it warns that other barriers, like an aversion to debt or a desire to leave a bequest, are not so easy to combat. These, the authors write, “are deeply rooted in traditional beliefs that are difficult, and potentially unwise, to alter.”