Reverse Mortgage Loans - The Pros and Cons

Transcription

1 TESTIMONY OF RAY LANDIS ADVOCACYMANAGER AARP PENNSYLVANIA REVERSE MORTGAGES BEFORE THE AGING AND OLDER ADULT SERVICES COMMITTEE PENNSYLVANIA HOUSE OF REPRESENTATIVES HAmSBURG, PENNSYLVANIA MARCH 26,2009

2 Thank you for the opportunity to appear before the House Aging and Older Adult Services Committee today. My name is Ray Landis, and I am the Advocacy Manager for AARP in Pennsylvania. The topic of today's hearing is certainly a timely one for older Pennsylvanians. Our current economic situation has caused difficuilties for many retired Pennsylvanians who are living on a relatively fixed income. Many of these individuals and couples have seen the value of the hnds they put away for retirement diminish drastically in the past year. Suddenly much of the planning many responsible older Pennsylvanians did in contemplating their retirement has been turned on its head. A reverse mortgage is one avenue that older people who are "cash poor" but "house rich" have been exploring in greater numbers. But while there are advantages for some in taking out a reverse mortgage, there are also many pitfalls for others. These pitfalls are part of the reason that an AARP study revealed that only 1 per cent of older homeowners have taken out a reverse mortgage. It is important to note at the outset of this discussion that AARP does not endorse any reverse mortgage lender or product. AARP has set out to be a provider of information on the general topic of reverse mortgages to its members and to other older Americans. Our view is that a reverse mortgage is an intensely personal decision for older individuals and couples and that the correct course of action depends on individual or couple's financial circumstances.

3 I have provided members ofthe Committee copies of a publication distributed by the AARP Foundation. Entitled "Reverse Mortgage Loans: Borrowing Against Your Home", it is designed to provide consumers with basic information about reverse mortgages. There is a great deal of background and basic knowledge about reverse mortgages in this publication. Perhaps the most important part of the booklet is Part 1, in which consumers are asked to keep five questions in mind when they consider reverse mortgages. These questions are: 1. Do you really need a reverse mortgage? 2. Can you afford a reverse mortgage? 3. Can you afford to start using up your home equity now? 4. Do you have less costly options? 5. Do you fully understand how these loans work? AARP feels it is critical that anyone considering a reverse mortgage carefully consider the answers to these questions before committing to this process. And, as AARP has discovered when surveying older Americans, when these questions are thoroughly considered by those considering reverse mortgages, many people decide to not pursue this idea. A great deal of the perspective AARP has on reverse mortgages has been shaped by a study AARP conducted among people who considered taking out a reverse mortgage. The results of this survey were issued as a report by the AARP Public Policy Institute entitled "Reverse Mortgages: Niche Product or Mainstream Solution?" The full 208 page report is available on AARP's website. 1 would like to discuss some of the findings, because they

4 not only demonstrate reasons why some individuals ultimately choose a reverse mortgage but also why many people in the end reject the idea of a reverse mortgage. One of the controversial aspects of a reverse mortgage is the question of whether borrowers Iook into a reverse mortgage to address basic needs or whether they consider a reverse mortgage as a way to get the funds needed to afford some "extras" in their life. Not surprisingly, it appears that the answer to this question is different among different groups. Older people, generally above the age of 80, particularly older females living on their own, are more likely to consider a reverse mortgage because of their inability to meet their basic needs. Married couples, particularly those below the age of 75, are more likely to consider a reverse mortgage in order to "have more money to spend on extras." Another question that was asked of reverse mortgage borrowers to probe a bit deeper into why they considered a reverse mortgage was to ask them to list the "main" reason they were looking into this option. For those who indicated they wanted to be able to afford some "extras" in their life, the most popular response was "to improve quality of life." But for those who said they needed a reverse mortgage to be able to afford basic necessities, the most common answer was to pay off their regular mortgage (note that retiring an existing mortgage is a condition for taking out a reverse mortgage). Health care costs were also a major factor in this category - many more individuals who described themselves in poor or fair health said they considered a reverse mortgage as a way to be able to afford their health

5 care. Finally, the ability to afford home improvement costs was also a significant factor in the decision to contemplate a reverse mortgage. The examples I just cited were reasons consumers gave for considering a reverse mortgage. But in the end, only about 1 percent of the 21.1 million households in the United States headed up by someone over the age of 62 actually do take out a reverse mortgage. Why? The first, quick reason is that studies have shown only approximately 10 million of these households could either qualify for a reverse mortgage or expect to derive an amount from the reverse mortgage that would make the cash benefit to be worth the cost. The primary reason for this is the high cost of reverse mortgages. Among those who were motivated enough to consider a reverse mortgage but eventually decided not to apply, the high cost was cited as the overwhelming reason for failing to take this step. Other issues that were cited by those who did not take out reverse mortgages for their decision included a realization that the reverse mortgage was not necessary, a realization that it might make more sense in the future that at the present, and the discovery of other ways to meet financial needs. All of these conclusions point to the importance of discussing the concept of a reverse mortgage with independent financial counselors, who can help to analyze financial needs and who also have knowledge of other approaches to address the financial concerns of older people. Another interesting aspect of the study was the increase in consumer awareness of reverse mortgages over time and how this impacted their confidence in the product. AARP had conducted a similar survey to our

6 2007 study in At that point only 51% of respondents had heard of a reverse mortgage. By 2007,70% of those surveyed were familiar with the product. But while 19% percent respondents felt they might consider a reverse mortgage at some point in the hture in 1999, only 14% felt that way in Other surveys taken around the same time shows similar attitudes toward reverse mortgages. A final part of the study analyzed the satisfaction of those who took out reverse mortgages. Generally, borrowers were satisfied with how reverse mortgages had impacted their lives. In particular, homeowners above the age of 80 reported that a reverse mortgage had enabled them to remain in their home. One caveat about this information must be remembered, however - 9 out of 10 borrowers in the survey had obtained their reverse mortgage within the past three years, meaning that the long-term satisfaction rate of those taking out a reverse mortgage has not really been measured. This study, and other research AARP has done with its members about reverse mortgages, has led to five AARP conclusions about reverse mortgages. First, the most common reverse mortgage product, the Federal Housing Administration's Home Equity Conversion Mortgage, has successfully created a foundation for the fmancial structure of the reverse mortgage industry, demonstrated by the growth in volume of reverse mortgages. Second, older homeowners who take out a reverse mortgage express a high degree of initial satisfaction. Third, loan costs are too high, which prevents many older homeowners from taking out a reverse mortgage. Fourth, consumer knowledge and confidence in reverse mortgages is still

7 low. And finally, more research is needed to determine the long-term impact of reverse mortgages on borrowers. Of course we are now living in a different world economically than we were in 2006 and 2007, when our survey was done. It is likely that more older homeowners will be considering reverse mortgages now and into the near future because of the recent economic decline. But a significant obstacle to this process is likely to be the decline in the value of homes that has occurred. AARP was pleased the United States Congress included provisions in the Housing Bill that was signed into law in 2008 by President Bush that limited origination fees on reverse mortgages and created a national home value limit that increased the equity that many older homeowners could obtain when taking out a reverse mortgage. This will help address the reduction in home values that has occurred across the nation, but will still not make it feasible for all older homeowners to consider reverse mortgages. In addition, the new federal stimulus package increased the loan limit for reverse mortgages, enabling older Americans to borrow more against their homes. In the face of declining home values, however, this change may only benefit those who own very expensive homes. In summary, AARP feels the most critical aspect of the reverse mortgage issue is to ensure that potential borrowers carefully consider all their options before committing to this process. AARP highly recommends that anyone contemplating taking out a reverse mortgage meet with a financial counselor to discuss the pros and cons as they relate to their individual financial situation. Our studies appear to indicate that some older homeowners can

8 benefit from a reverse mortgage and can use it to stay in their home and in their community, which we know is a goal of most older Pennsylvanians. But the high initial costs of this product, combined with options for addressing financial concerns in other ways, such as Pennsylvania's property taxlrent relief program or PACEPACENET program, may make a reverse mortgage a bad decision for others. AARP has a great deal of consumer information beyond the information I provided the Committee today available on its website or through the AARP Pennsylvania office, although I will say the booklet I brought along is probably the most thorough source presented in a consumer-friendly way. I would be happy to share any of this further information with any Committee member or others who would like it, and I would be pleased to answer any questions you may have at this time. Thank you again for the opportunity to be here today.