In light of so many difficulties facing American seniors as they look for reliable sources of cash flow in retirement and while on a fixed income, expanded use of the Home Equity Conversion Mortgage (HECM) program as sponsored by the Federal Housing Administration (FHA) could present one potential tool for seniors struggling through their post-working lives.

This was a contention made by Shai Akabas, director of economic policy at the Bipartisan Policy Center (BPC) during testimony before the United States Senate Select Committee on Aging late last month. Akabas provided testimony to the select committee alongside Retirement Savings Project Director Dr. John Scott of the Pew Charitable Trusts, Director of the Retirement Security Program at the University of California at Berkeley Dr. Nari Rhee and Founder, President and CEO of Retirement Clearinghouse J. Spencer Williams.

How reverse mortgages can help

Akabas previously addressed members of the Senate in May, when he testified before the Senate Health, Education, Labor, and Pensions (HELP) Committee and mentioned how home equity could be a major assistive factor in solving issues related to a potential retirement crisis. He specifically recommended that lawmakers aim to “improve this market and make it a simpler, more useful, and a more cost-effective tool for older, ‘cash poor’ Americans to utilize their home equity.”

Speaking to the Senate Select Committee on Aging in October, Akabas detailed that home equity is currently underused and could present a viable path forward for many retirees without necessarily relying on broader social programs.

“Americans own $21 trillion in home equity, a sum that could significantly supplement the nation’s $35 trillion of retirement assets,” he said in his testimony. “For many retirees, home equity represents a significant portion of their wealth: Half of homeowners aged 62 or older hold most of their net worth in home equity. Notably, a majority of individuals aged 62 or older with no retirement savings or pension are homeowners, meaning that many of these older Americans can – and will have to – rely on home equity to supplement their Social Security benefits.”

While many older Americans may choose more conventional home equity tapping options including selling and downsizing into a smaller home while pocketing the remainder of a sale’s proceeds, borrowing against a home’s value presents potential advantages. While citing reverse mortgages, second mortgages and home equity lines of credit (HELOCs) as possible mechanisms to borrow against a home’s value, Akabas specifically called out reverse mortgages for having unrealized assistive potential.

“Reverse mortgages, especially, offer a potentially useful tool to convert illiquid housing wealth into money to live on during retirement, but the market for them is currently quite small,” Akabas said, citing a June 2016 BPC report to corroborate the characterization. “Policymakers could work to improve this market and make it a simpler, more useful, and a more cost-effective tool for older, ‘cash poor’ Americans to utilize their home equity.”

Focus of the senators

Select committee ranking member Sen. Tim Scott (R-S.C.) offered his perspectives on crucial retirement issues that Congress may be able to address, including “leakage” of finances from retirement accounts, and what he called “obstacles” which could prevent small businesses from providing retirement accounts to employees.

“Helping small businesses launch retirement plans is crucial to boosting employee savings and closing the gap [between] how much money you need when you’re retired and how much money you can save along the way,” Sen. Scott said in his opening statement. “Research shows that workers who earn between $30,000 and $50,000 are 12 times more likely to save through employer-provided plans than on their own.”

Scott also decried the Retirement Earnings Test (RET) – which limits the amount of Social Security benefits a senior can take if they continue to work before reaching full retirement age – as needlessly obtrusive.

“[The RET] confuses retirees and disincentives work because it is viewed as a tax,” Scott said. “That’s why, today, I introduced the Senior Citizens’ Freedom to Work Act of 2021 to remove the RET and simplify the decision-making process for seniors.”

On the Democratic side, committee chairman Sen. Bob Casey (D-Penn.) characterized the headwinds facing retirees a bit differently, focusing instead on insufficiency of current programs which should be bolstered or expanded, he said.

“We have to protect and strengthen Social Security, the bedrock of our retirement system,” Sen. Casey said. “We must also support the family caregivers, mostly women, who leave the workplace, undermining their ability to save and plan for the future. That’s why my Better Care Better Jobs Act is critical – it will not only raise wages for home care workers, but allow them to save more for retirement.”

The issue of underutilization

After speaking to members of the Senate this past summer, RMD asked Akabas about issues related to the tapping of home equity in retirement, and he explained that its employment in retirement leaves a lot to be desired.

“Broadly speaking, home equity is one of the largest assets held by older Americans, yet it’s being criminally underutilized for retirement security,” Akabas told RMD in July. “There is legitimate debate about whether the current iteration of reverse mortgages is the right key to unlock home equity in retirement, but we need policymakers and the private sector to be working together to tackle this challenge.”

Describing reverse mortgage lines of credit as “another tool in the toolbox,” Akabas expressed that such prospects should be explored so that seniors who could benefit from such loans are aware of the option. However, awareness of such tools is a broader issue in and of itself, he said.

“Reverse mortgage lines of credit […] allow people to only draw the funds they need and avoid accruing interest on the full reverse mortgage loan amount,” Akabas said. “Finally, the lack of consumer awareness surrounding the multitude of options available to tap into home equity in retirement indicates that we need to do a better job educating the public on what these options are, including the pros, cons, and tradeoffs.”

Watch a video of the hearing at the Senate Select Committee on Aging.