Reverse Mortgage Program Changes Impact Americans’ Retirement Security

Of late, reverse mortgages have been touted as ways to supplement retirement income and offset the rising challenges retirees are facing.

However, new data shows that more than half of today’s households lack enough retirement income to maintain their pre-retirement standard of living — in part due to reverse mortgage changes that took effect in 2013, according to a recent report by the Center for Retirement Research (CRR) at Boston College. 

The report analyzes the National Retirement Risk Index (NRRI) in 2013 — the latest data available — which shows the share of working-age households who are “at risk” of being unable to maintain their pre-retirement standard of living in retirement.

And as measured by the NRRI, Americans’ financial preparedness has only slightly improved since 2010. 

In fact, 52% of households are considered at risk, only a 1% drop from 2010, impacted by reverse mortgage rules, the rise in Social Security’s Full Retirement Age and the decline in interest rates. 

Last year, the Department of Housing and Urban Development (HUD) simplified the Home Equity Conversion Mortgage (HECM) rules and lowered the percentage of the home’s value that borrowers could tap in the form of a reverse mortgage at any given interest rate. [HUD has since issued new program changes in 2014, which made more proceeds available for some reverse mortgage borrowers.]

“Our expectation was that the NRRI would improve sharply in 2013; it certainly felt like a better year than 2010,” the CRR writes. “But the ratio of wealth to income had not bounced back from the financial crisis, more households faced a higher Social Security Full Retirement Age, and the government had tightened up on the percentage of housing equity that borrowers could extract through a reverse mortgage.”

Other factors reduced the NRRI, creating a push-pull environment impacting Americans’ finances. These drivers included increasing equity and house prices.

In the NRRI, home ownership and home prices have a significant impact because households are assumed to access their home equity at retirement by taking out a reverse mortgage. The higher the home value, the more a household can extract in cash and turn into an income stream through annuitization.

Ultimately, however, the NRRI suggests retirement shortfalls are a major problem and that, to address this issue, Americans must save more and/or work longer.  

Access the full report here

Written by Emily Study

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