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.

Housing Tomorrow’s Seniors

photo by Government of Alberta

Harvard’s Joint Center for Housing Studies has issued a report, Projections & Implications for Housing a Growing Population: Older Households 2015-2035. The report opens,

Over the next twenty years, the population aged 65 and over is expected to grow from 48 million to 79 million. Meanwhile, the number of households headed by someone in that age group will increase by 66 percent to almost 50 million—with the result that by 2035, an astounding one out of three American households will be headed by someone aged 65 or older.

Older adults’ homes and living situations are keys to their quality of life and capacity to live independently. The expansion of the older population will increase the need for affordable, accessible housing that is well-connected to services well beyond what current supply can meet. In addition, the home is an increasingly important setting for the delivery of long-term care, a trend likely to grow over the next two decades as millions more seek to remain in their current dwellings while coping with disabilities and health challenges.

Over the next two decades, many older households will have the financial means to secure housing and supportive services suited to their needs as they age. The focus for these households should be on making informed choices about potential living situations and locations, investments in home modifications, and care—before physical or financial needs become pressing.

Yet over the same period, millions of low-income older households will struggle to pay for appropriate housing and necessary supportive services. For these households, basic housing costs will drain resources needed to pay for home modifications or in-home services, and may force reductions in spending on critical needs like food and healthcare.

The nation is now at the beginning of a twenty-plus-year surge in the older population, and is thus at a critical point for putting in place the affordable housing options, accessibility features, and in-home care services that will be needed over the next two decades. Transportation and technologies to ensure people can remain engaged in their communities and access supportive services are also needed. While many older adults indicate that they prefer to age in their current residences, a wider array of housing types can offer safer, more affordable, and lower-maintenance homes within existing communities, improving housing situations without uprooting older adults from the places they have called home for years or even decades. (4-5)

The report obviously raises important points about the need to plan for the aging of the American population. I am not hopeful, however, that the federal government will be offering leadership on these issues. It will be up to the states to identify policies that the can implement. Some proposals that are worth a look include

  • providing incentives to include accessibility (or at least accessibility-ready) features in new construction;
  • strengthening the ties between health care and housing; and
  • increasing public awareness of the benefits of planning for the challenges of aging before they actually arrive.