Rising Mortgage Borrowing for Seniors

graphic by www.aag.com/retirement-reverse-mortgage-pictures

J. Michael Collins et al. have posted Exploring the Rise of Mortgage Borrowing Among Older Americans to SSRN. The abstract reads,

3.6 million more older American households have a mortgage than 2000, contributing to an increase in mortgage usage among the elderly of thirty-nine percent. Rather than collecting imputed rent, older households are borrowing against home equity, potentially with loan terms that exceed their expected life spans. This paper explores several possible explanations for the rise in mortgage borrowing among the elderly over the past 35 years and its consequences. A primary factor is an increase in homeownership rates, but tax policy, rent-to-price ratios, and increased housing consumption are also factors. We find little evidence that changes to household characteristics such as income, education, or bequest motives are driving increased mortgage borrowing trends. Rising mortgage borrowing provides older households with increased liquid saving, but it does not appear to be associated with decreases in non-housing consumption or increases in loan defaults.

The discussion in the paper raises a lot of issues that may be of interest to other researchers:

Changes to local housing markets tax laws, and housing consumption preferences also appear to contribute to differential changes in mortgage usage by age.

Examining sub-groups of households helps illuminate these patterns. Households with below-median assets and those without pensions account for most of the increase in borrowing. Yet there are no signs of rising defaults or financial hardship for these older households with mortgage debt.

Relatively older homeowners without other assets, especially non-retirement assets, may simply be borrowing to fund consumption in the present—there are some patterns of borrowing in response to local unemployment rates that are consistent with this concept. This could be direct consumption or to help family members.

Older homeowners are holding on to their homes, and their mortgages, longer and potentially smoothing consumption or preserving liquid savings. Low interest rates may have enticed many homeowners in their 50s and 60s into refinancing in the 2000s. Those loans had low rates, and given the decline in home equity and also other asset values in the recession, paying off these loans was less feasible. There is also some evidence that borrowing tends to be more common in areas where the relative costs of renting are higher–limiting other options. Whether these patterns are sustained as more current aging cohorts retire from work, housing prices appreciate, and interest rates increase remains ambiguous.

The increase in the use of mortgages by older households is a trend worthy of more study. This is also an important issue for financial planners, and policy makers, to monitor over the next few years as more cohorts of older households retire, and existing retirees either take on more debt or pay off their loans. Likewise, estate sales of property and probate courts may find more homes encumbered with a mortgage. Surviving widows and widowers may struggle to pay mortgage payments after the death of a spouse and face a reduction of pension or Social Security payments. This may be a form of default risk not currently priced into mortgage underwriting for older loan applicants. If more mortgage borrowing among the elderly results in more foreclosures, smaller inheritances, or even estates with negative values, this could have negative effects on extended families and communities.

Reiss on Green Bonds

Law360 quoted me in Green Bond Bandwagon Promises Cash Returns For NYC (behind a paywall). It opens,

A New York City proposal to market billions in so-called green bonds could reduce debt costs for the city by enticing investors who have stampeded toward guilt-free returns elsewhere, but buyers must tread carefully lest their money ends up funding projects not seen as environmentally relevant.

New York City Comptroller Scott M. Stringer put forth a plan last week that would see the city’s capital spending program add municipal bonds for financing environmentally friendly projects to its plans to issue $30 billion in new debt over four years.

The proposal, which Mayor Bill de Blasio’s administration is studying, suggests moving quickly while there this still a focus on reinforcing the city after Superstorm Sandy and amid the strong demand for green bonds in the private sector as well as in California, Massachusetts and Washington, D.C. As soon as next year, the city could being to convert a large portion of its Municipal Water Finance Authority debt — some $1.5 billion per year — into green bonds and could allocate up to $200 million per year in Transitional Finance Authority and general obligation bonds to similar use.

“Green bonds should be another example of how New York City leads the nation in finding solutions that work,” Stringer said.

While experts in public debt investment largely see the proposal as a promotional bid to market New York City debt, they note that the city’s high national profile could make such a move profitable amid investor hunger to capitalize environmentally friendly projects.

“The big question is: How much demand would this create? One of the main points of the green bonds would be to increase demand,” said Brooklyn Law School professor David Reiss, an expert in real estate finance and community development. “If there really is pent-up demand, and New York City acts as an early mover, it might get a short-term benefit in the cost of borrowing.”

Stringer’s prediction that New York City could spark others to follow suit would also likely come true, Reiss said.

“If this is demonstrated to materially drive down borrowing costs, you’ll see others doing the same thing,” he said. “I’m a little skeptical, over the long term, that you’d have serious savings. But in the shorter term, you might.”