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Improving Options for Seniors Who Are “House-Rich, Cash-Poor”

For most homeowning households, home equity makes up the largest portion of net worth. This is particularly true for older homeowners of color. Among Black and Latino senior homeowners (those ages 62 and older), home equity accounts for 89 percent and 81 percent of net worth, compared with 47 percent of net worth among white senior homeowners.

As the US population ages, more attention has been given to how older adults will finance their expenses in late life and how this will affect housing stability. For those who are “house-rich, cash-poor”—those with significant home equity but little in liquid assets—expanding the Home Equity Conversion Mortgage (HECM) program could go a long way toward providing stability. But, to support households’ well-being, this expansion should be done alongside other improvements to the safety net for senior households.

What are HECMs, and why do they matter for stability?

The HECM program, or the reverse mortgage program administered by Federal Housing Administration (FHA)–approved lenders for homeowners 62 and older, allows seniors to withdraw a portion of home equity to use for maintenance, repairs, or general living expenses.

This is particularly critical for homeowners of color, who have fewer liquid assets, on average, compared with white homeowners and who are more likely to be cost burdened. The history of structural racism has contributed to households of color being more likely to be house-rich, cash-poor compared with white households. Black homeowners, for example, are more likely to need to tap into home equity because of lower wealth and lifetime incomes, less coverage from employer-sponsored retirement plans, and lower median earnings from Social Security. But across the income spectrum, Black HECM applicants are more likely than their white counterparts to be denied loans, in part because of financial precarity and the inability to pay the high up-front costs of HECMs.

This is compounded by the HECM program’s complexity and the difficulty borrowers and investors experience navigating the program.

Supply- and demand-side challenges to HECMs

The supply-side challenges to HECMs come from both lenders and servicers. The program has very few lenders, in part because of the bankruptcy of one of the program’s servicers and industry consolidation, which has strained liquidity of both lenders and servicers. While Ginnie Mae guarantees the mortgage-backed securities of FHA-, US Department of Veterans Affairs–, and Department of Agriculture–insured loans created by lenders, this means HECM loans stay on lenders’ books even after they’re securitized by Ginnie Mae, decreasing liquidity. Once loans hit 98 percent of their initial appraised value, Ginnie Mae requires the lender to buy all the HECMs out of the Ginnie Mae pool. This ensures Ginnie Mae can provide investors clarity on when they will recoup their investment, given the difference in the life of loan relative to more traditional mortgage-backed securities.

Generally, the lender can assign qualifying HECM loans to the FHA, which can take over responsibilities and reimburse the lender for the buyout, but the FHA will not accept any loan with delinquent property taxes or insurance payments or a loan for which the borrower has already vacated or passed away. This is about one in five HECM loans and creates seriously high costs for HECM lenders and servicers, making them unattractive.

On the demand side, the current take-up rate for HECMs is very low. Home equity is a key source of net worth for senior homeowners, and many use reverse mortgages to access this net worth. Yet fewer than 6 percent of reverse mortgages made to seniors are HECMs. The vast majority of seniors tapping into their home equity opt for cash-out refinances or home equity lines of credit (HELOCs) over HECM loans. But HELOCs require high credit scores, putting them out of reach for many homeowners, and cash-out refinances are less attractive when rates are high.

So why aren’t more seniors taking out HECMs? The determining factor could be the high up-front costs of these loans, a massive barrier for those who are cash-poor and most in need of the liquidity a HECM could provide. Given that the share of older homeowners with a mortgage has increased significantly in recent years, policymakers may want to consider creating a streamlined HECM program that allows borrowers to convert a forward mortgage into a reverse one.

As the US population ages, improving the HECM program is critical for HECMs to be a viable and attractive way for seniors to extract home equity when desired. However, a recent survey from Fannie Mae found most seniors don’t want to take on debt or use their home equity, and research has found that reverse mortgages like HECMs have been a way for seniors to navigate a limited social safety net.

Is extracting home equity the “best” option—or the only one?

For many, reverse mortgages are a last resort when seniors are faced with foreclosures, income shortfalls, or increased health expenses.

And while opting for a reverse mortgage in these situations may be the only way to avoid disaster, it can also limit or erase intergenerational transfers of wealth and exacerbate the racial wealth gap. When senior homeowners with HECMs pass away, their heirs will have to pay the full loan balance or 95 percent of the home’s appraised value, whatever is less. This typically requires selling the home or turning the property over to the lender.

But if extracting home equity through a HECM, a cash-out refinance, or a HELOC is the only way for them to stay afloat in old age, homeowners of color may not be able to transfer wealth to their children to the same degree as white homeowners, contributing to racial wealth gaps and gaps in intergenerational transfers.

This is particularly important because the Black homeownership rate is projected to fall below the rate of previous generations at the same age in the coming decades. Protecting hard-won wealth of older generations and enabling them to pass it on to the next generations is critical to ensuring that the advances in Black homeownership made in the past few decades are not lost to the next.

For homeowners who do want to extract home equity to cover home improvements, medical expenses, or other costs in retirement they need to age in place, a HECM loan may be the right choice. But homeowners shouldn’t be forced to make that decision—one that might determine what they can pass on to their heirs or undermine the cultural significance of a home being in the family for generations—because they are backed into a corner.

What can policymakers do to improve equity and outcomes for seniors?

As the United States population ages, the bottom line is that we need to create more opportunities for stability in the face of rising health care, housing, and other living expenses. Improving the HECM program is a great first step policymakers can take.

The FHA should consider making their proposed changes that will provide an alternative path to mortgage insurance claim payment for HECMs due solely to the death of borrowers and eligible nonborrower spouses. Ginnie Mae should also consider making the changes they’re discussing to accept HECM loans with balances above the FHA’s maximum claim amount, which could improve stability in the HECM market.

Policymakers could also consider adding a lower-cost HECM option for borrowers who want a small disbursement or reintroducing the HECM Saver program, which had lower up-front costs and annual fees. This would help senior homeowners with lower incomes who need access to home equity but can’t meet the high cost of HECMs. It would also benefit homeowners that need some liquidity, but do not want to liquidate the majority of their home, perhaps in an effort to preserve it for their heirs.

Additionally, to get a HECM loan, all prospective borrowers are required to consult a financial counselor approved by the US Department of Housing and Urban Development (HUD). These financial counselors are critical in helping borrowers and their families understand the structure of the loans and the risks. Given their interaction with borrowers in need of liquid assets, these HUD-approved counselors should be trained to help borrowers navigate other financial support programs that might help them address income or health challenges. Even though most homeowners prefer to age in place, counselors can also help them consider whether a sale—perhaps even to a family member—and a downsizing move is a better option than an HECM to liquidate assets and achieve financial security. Financial counselors can also help homeowners determine whether other equity extraction options, like HELOCs or cash-out refinances, are a better option for them based on their current income, debt, and home value.

Streamlining and strengthening the HECM program is important, but policymakers must simultaneously enhance other supports for seniors to ensure equitable outcomes now and for the next generation. If the HECM is the only safety net for seniors, we’re leaving out nonhomeowner households, those with limited home equity, or those who don’t qualify for or don’t want an HECM. And with home equity extraction being the only viable option for many homeowners that need cash, the intergenerational value of homeownership may be seriously depleted. More work must be done to improve supports for senior households so that drawing on home equity is a choice, not the only option.