A Bipartisan Policy Center commission tasked with addressing the issues related to retirement security and savings that older Americans face called for the creation of a pool for low-dollar reverse mortgage loans.
Creating such a pool would reduce the high costs of reverse mortgages and the risk they pose to the Federal Housing Administration, according to a report released Thursday by the Bipartisan Policy Center's Commission on Retirement Security and Personal Savings. The under-utilization of home equity was one of several retirement-related challenges that the report addressed, with others including the need for Social Security reform, limited knowledge of personal finance and leakage from retirement accounts.
The commission noted that a low-dollar reverse mortgage, offered in addition to existing programs, would allow older Americans to tap into smaller amounts of home equity for their spending needs. But the report's authors cautioned that the FHA would need to implement tighter borrowing limits.
"With tighter borrowing limits, homeowners would be less likely to take on high levels of debt, and the federal government would face less risk from a housing market downturn," the commission said in the report.
As a result of these factors, the group reasoned that the FHA could charge a lower mortgage insurance premium, which currently can cost up to 2.5% of the maximum claim amount and drives up the cost of reverse mortgages. The report noted that the FHA's previous attempt at a lower-dollar reverse mortgage, the HECM Saver product that was available from 2010 to 2013, ended up charging identical MIPs to a standard home equity conversion mortgage.
And the report's authors argued that such a product might have a captive audience.
"Compared to the current system, a scaled-down HECM might appeal to a different type of borrower — a retiree who faces a nonrecurring consumption need, for example, rather than someone who has long-term, serious financial issues," they wrote.
The report also recommended that government agencies strengthen programs that advise consumers about reverse mortgages and marketing tied to the loans, noting that many homeowners who could benefit from this product "are unaware that advice is available."
To start, the commission suggested that the FHA receive additional resources to administer HECMs and HECM-related counseling. But the commission called on the FHA to engage other agencies with stakes in the issue including the Treasury Department, the Consumer Financial Protection Bureau and the Social Security Administration "to develop a strategic plan for how reverse mortgages can play the most appropriate role in retirement security."
Additionally, the commission proposed that federal and state governments re-evaluate subsidies tied to mortgages and home equity lines of credit.
"The portion of older Americans holding mortgage debt has more than doubled in recent years," the commission said in the report. "Part of the blame lies with federal policy, which encourages home debt by making mortgage interest tax deductible."
Limiting these deductions and subsidies would encourage the preservation of home equity for retirement, the group argued, which could in turn lift retirement security.
