Paving a path to better reverse mortgages

The MIT GCFP and Columbia University convened a group of leading researchers, policymakers, industry participants and consumer advocates to discuss the U.S. reverse mortgage market. The meeting took place on August 3 at Columbia University.

Home equity makes up almost half of older households’ median net worth. Because home equity is illiquid, many elders face the prospect of either having to sell their home before they want to or forgoing access to those much-needed savings. Reverse mortgages allow retirees to unlock a portion of their home equity while ensuring that they can age in place. In the U.S., almost all reverse mortgages are originated under the federal government’s Home Equity Conversion Mortgage (HECM) program.

GCFP co-director and finance professor Robert Merton kicked off the day with a talk highlighting the potential of reverse mortgages to substantially improve retirement outcomes as well as proposals for financial structures that would promote more efficient risk-sharing and market growth. Presentations by other participants illuminated the history and current state of the U.S. market, and the current regulatory and structural impediments to the development of better products and practices.

Following the presentations, a roundtable discussion produced a list of unanimous recommendations for policy changes that could improve transparency, increase competition, and lower costs to borrowers and the government. “It was heartening to see so much agreement among experts with such diverse perspectives,” notes Deborah Lucas, Director of the GCFP and one of the meeting co-conveners. “There was a lot of excitement when we figured that out. These modest changes seem entirely feasible, and if they were adopted it could be a catalyst for the market to really take off.”

The group plans to release a white paper summarizing its recommendations and to reconvene next year. The MIT GCFP will host a website for the group to provide information on reverse mortgages to researchers, policymakers, financial counselors, lenders and borrowers.

Internationally, policymakers also are looking to reverse mortgages to help pay for the retirement of their rapidly aging populations. So far, uptake has been slow, but there is optimism that innovation and need will lead to demand growth. In Korea, reverse mortgages are being sold under the friendlier moniker of home pensions. Singapore has recently liberalized its lease buyback program to encourage greater participation. The markets in the UK, Italy, Canada and China are at various stages of development, with growth occurring particularly rapidly in Italy.