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.

Foreclosure Alternatives


Realtor.com quoted me in 3 Foreclosure Alternatives: What to Do Before Your Mortgage Goes Underwater. It opens,

Maybe you’ve missed a couple of monthly mortgage payments. Maybe a notice of default from your lender is looming right now. You understand the severity of the situation, but what most homeowners don’t know is that foreclosure is not the only option you have when you’re no longer able to afford your house.

The first step for anyone in risk of foreclosure is to get in contact with your lender. This shows that you are aware of the problem and committed to finding a solution—and trust us, that will go a long way. The earlier you reach out, the greater shot you have of amicably rectifying the problem.

After you speak with your lender, your lender will lay out your options, including the foreclosure alternatives that you might be able to take advantage of. Let’s take a closer look at some of the alternatives so you—and your credit history—don’t suffer the ultimate blow.

1. Standard sale or rental

If your home is currently valued at more than you owe and if you are up to date on your mortgage payments (but you anticipate that paying your mortgage could become a problem), you can hold out as long as possible for a buyer.

You can also try to rent out the home to cover the mortgage payments until the house sells, says Carolyn Rae Cole, a Realtor® with Nourmand & Associates. In the end, virtually all homes eventually sell—it’s just about pricing.

2. Short sale

When a home has fallen in value and is priced so low that there isn’t enough equity to cover the mortgage, you might have the option to conduct a short sale. It’s also known as going “underwater.” This means the lender agrees to accept less than the amount the borrower owes through a sale of the property to a third party.

A short sale works like this: A specialist brokers a deal with the mortgage lender to sell the home for whatever the market will bear. If the amount of the sale is for less than what’s owed on the mortgage, the lender gets the money from the sale and relinquishes the remaining debt. (This means you won’t owe anything else.) In a short sale, the lender usually pays for the seller’s closing costs. A traditional sale takes about 30 to 45 days to close after the offer is accepted, whereas a short sale can take 90 to 120 days, sometimes even longer.

Sellers will need to prove hardship—like a loss of primary income or death of a spouse—to their lender. In addition to explaining why they’re unable to make mortgage payments, sellers will have to provide supporting financial documents to the lender to consider for a short sale.

3. Deed in lieu of foreclosure agreement

A deed in lieu of foreclosure is a transaction between a lender and borrower that effectively ends a home loan. Essentially both parties agree to avoid a lengthy foreclosure proceeding by the borrower voluntarily turning over the home’s deed to a lender, says professor David Reiss of Brooklyn Law School
. The lender then releases the borrower from any further liability relating to the mortgage. However, if the property is worth significantly less than the outstanding mortgage, the lender may require the borrower to pay a portion of the remaining loan balance.

You might be eligible for a deed in lieu if you’re experiencing financial hardship, can’t afford your current mortgage payment, and were unable to sell your property at fair market value for at least 90 days.

Bottom line: This agreement is a negotiated solution to a bad situation—borrowers who have fallen behind on their payments are going to lose their house and the lender is not getting paid back in full.

First-Time Homebuyer Tips

The Lenders Network quoted me in First-Time Home Buyer Tips and Advice from Top Mortgage & Real Estate Experts. It reads, in part,

If you’re in the market to purchase your first home, then you know there’s much for you to learn. First-time homebuyers often make many mistakes they wish they didn’t. You’re making the biggest financial decision in your life, you want to make sure you don’t make any mistakes. So we asked mortgage and real estate experts what advice they would give first-time homebuyers.

*     *     *

8. Look into a HomeReady HomePath Loan

“Many first-time home buyers look to Federal Housing Administration –insured mortgages which have low down payment requirements.

Fannie Mae and Freddie Mac both offer loan programs to lenders who lend to first –time homebuyers of one-unit residences.

These programs have down payment requirements that are as low as 3 percent. Fannie’s program is called HomeReady.

It defines a first-time homebuyer as “An individual is to be considered a first-time home buyer who

1. Is purchasing the security property;

2. Will reside in the security property as a principal residence; and

3.  Had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase of the security property.

In addition, an individual who is a displaced homemaker or single parent also will be considered a first-time home buyer if he or she had no ownership interest in a principal residence (other than a joint ownership interest with a spouse) during the preceding three-year time period.”

Who Qualifies as a First-Time Homebuyer?

NewHomeSource quoted me in Who Qualifies as a First-Time Homebuyer? It opens,

You don’t always have to be a first-time homebuyer to qualify for down payment assistance programs.

As you consider purchasing a home, you may have come across down payment assistance programs that aim to assist first-time homebuyers.

“How can I qualify?” you might have asked yourself.

It turns out, you don’t always have to be a first-time homebuyer to qualify, even though it might say otherwise in the name.

“Freddie Mac defines ‘first-time homebuyers’ for its Home Possible program as someone who had ‘no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase of the mortgage premises,’” says David Reiss, professor of law and research director for the Center for Urban Business Entrepreneurship at the Brooklyn Law School.

Freddie Mac, a government-sponsored home loan mortgage corporation, says that its Home Possible mortgages offer low down payments for low- to moderate-income homebuyers or buyers in high-cost or underserved communities.

Another federal mortgage association, Fannie Mae, also offers down payment assistance programs for first-time homebuyers.

“The Fannie Mae standard 97% LTV Options let first-time homebuyers put down 3 percent,” says Reiss. “The program defines a first-time homebuyer as someone who ‘had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of purchase of the security property.’”

Similarly, the U.S Department of Housing and Urban Development defines a first-time homebuyer as an individual who has had no ownership in a principal residence three years prior to the closing date of the property.

Not a first-time homebuyer under these definitions? There’s hope for you still.

“Given the overwhelming dominance that the FHA, Fannie and Freddie have on the mortgage market, homebuyers who have sat out of the housing market for a while may find that they qualify for first-time homebuyer programs even if they have owned a home before,” adds Reiss.

Additionally, there are also assistance programs available for “displaced homemakers.” A displaced homemaker generally meets the following qualifications:

  • Provided unpaid services to family members in the home, such as a stay-at-home parent,
  • Were given financial assistance from another family member, but are no longer supported by that income and
  • Are unemployed/underemployed with difficulty gaining employment or upgraded pay.

“A displaced homemaker or single parent will also be considered a first-time homebuyer if he or she had no ownership interest in a principal residence (other than a joint ownership interest with a spouse) during the preceding three-year time period,” Reiss says.

The Mortgage After a Spouse’s Death

photo by Dr. Neil Clifton

BeSmartee.com quoted me in What Happens to My Mortgage When My Spouse Dies? It opens,

We would like to help by answering the question of what happens to your mortgage when your spouse dies, and we’ve asked several experts to chime in.

It’s bad enough when your spouse dies, but to also worry about what will happen with your mortgage only adds to the turmoil. We would like to help by answering the question of what happens to your mortgage when your spouse dies, and we’ve asked several experts to chime in.

When You Are on the Deed

If you and your spouse took out a mortgage loan together, you would then be responsible for paying the mortgage by yourself if your spouse dies. ”If the surviving spouses’ name is on the mortgage, they are now responsible for the entire mortgage,” says Randall R. Saxton, a Madison, MS, attorney. But you have inherited your spouses’ half of the home, which typically means you don’t need to change the title.

Your partner’s passing doesn’t disqualify the mortgage or let the lender call it in immediately, using a ”due-on-sale” clause. Such clauses let mortgage lenders demand the entire mortgage be paid if a new owner assumes the mortgage, or they take the house back. But the Garn-St. Germain Depository Institutions Act of 1982 prohibits lenders from using the due-on-sale clause when your spouse dies. But you would need to be able to handle the mortgage payments on your own to keep the house. ”While the lender cannot automatically foreclose due to the death of the mortgagee, they will be able to foreclose if the surviving spouse is unable to pay,” says Saxton.

Saxton has a suggestion: ”I always recommend life insurance policies, which would enable the surviving spouse to either pay off or maintain the payments of the mortgage.”

When You Are Not on the Deed

If you are not on the mortgage deed and your partner dies, your partner’s will should determine whether you get the house. If your partner didn’t have a will, your spouses’ assets will be distributed according to your state’s intestate laws.

Typically you, as the surviving spouse, will get your spouses’ assets after all expenses, such as funeral expenses and other debts, are paid. If there are enough assets in the estate, the mortgage will be paid. ”The estate will pay off the mortgage during probate,” says Aviva S. Pinto, CDFA, a wealth advisor at Bronfman E. L. Rothschild in New York City. ”If there are not sufficient assets to cover all debts, the house will have to be sold to pay off the debt,” says Pinto.

If you have children, your share is split with them. ”For example, if there is only one child of the deceased, the surviving spouse will own 50 percent of the property, and the child will own 50 percent of the property,” says Saxton. ”If neither [of you] pay the mortgage, the lender will be able to foreclose.”

Your Mortgage Lender Should Offer Help

No matter your particular situation, if your partner dies, you should contact your mortgage lender as soon as possible. They can help guide you on what will happen and your options. ”The Consumer Financial Protection Bureau has recently issued a rule to provide more protections to the survivors of a homeowner,” says David Reiss, professor of law at Brooklyn Law School. ”The rule gives widowed spouses some help in dealing with mortgage issues at a difficult time.”

Here are some specifics on how your mortgage lender can help, according to Reiss:

1. Mortgage servicers have to tell the widowed spouse about the documents that are necessary to confirm his or her status as a successor in interest to the deceased spouse.

2. Servicers are also required to provide many of the same notices and documents to the surviving spouse who is a successor in interest that the deceased spouse would have received.

Millennials Coming Home

 

07-08_prod_look_homeward_angel

I was interviewed on Voice of America’s American Café in a story, Millennials Coming Home. The story touches on many of the themes that I blogged about last week. VoA sets up the show as follows:

A new study says that more American young people are moving back home after college than ever before. VOA’s American Cafe host David Byrd talks with three experts about this trend – how did it start, where is it going, and what does it mean?

You can listen to the edited podcast here and the complete interview with me here.