Forward on Reverse: Reverse mortgages for first-time homebuyers
Taiwan has seen the future of retirement security: There are reverse mortgages in it. And it plans to help its first-time homebuyers think reverse early, a notion I have been pushing here for years. Addressing a national conference on reverse mortgages in December 2009, Chang Chin-oh, a professor of land economics at National Chengchi University in Taipei City, Taiwan, mentioned an intriguing aspect of an evolving Taiwanese reverse-mortgage model: “The program will also encourage young people to start planning a home purchase early for retirement [my emphasis].”* Let me repeat: Plan a home purchase early for retirement! In Think Reverse! (2008) and in several articles I wrote before the book was published, I argued that, in an era of uncertain retirement cash flow sources, our home equity, thanks to reverse mortgages and other equity take-out products, has become a new pillar of retirement security. The long-term solvency of Social Security is in doubt as is Medicare. Companies are bailing out of their pension obligations and pushing employees to take responsibility for their own retirement finance through 401(k)s and other vehicles. And 401(k)s are tied to the vagaries of financial markets. From 1998-2008, we experienced at least four significant financial crises, with the mother of all financial crises in 2008. As we slowly dig ourselves out of the rubble of the 2008 financial earthquake, fresh thinking in retirement finance is needed. Reverse capacity, through reverse mortgages, has to be a part of a new retirement finance calculus. A recent fact sheet from the Center for Retirement Research at Boston College left no doubt about the emerging role of reverse capacity in retirement: “Given the bursting of the housing bubble, it is tempting to forget how important housing is to the portfolios of older Americans. Indeed, housing prices did collapse. …. However, even after the decline, housing equity remains a crucial component of the assets of most households.” ** For decades, the retirement planning industry and policy leaders have been urging Americans to save for retirement. That is sound traditional advice. And to that, I add a complementary new call: Build reverse capacity! So, what is “reverse capacity” in the context of retirement cash flow planning and management? I propose three related definitions: ►First, it is the net home equity that is convertible into cash via reverse mortgages. ►Second, it is the cash and non-cash value inherent in a reverse mortgage loan. ►And third, reverse capacity is the life-planning and estate management value peculiar to reverse mortgage loans. A full study of reverse capacity and its implication for retirement finance in the 21st century will be the subject of my next book. For now, to build reverse capacity, young families should plan their home purchase early and not use their home as a "piggy bank" to pay for non-emergency pre-retirement consumption. Using the tax code, Congress should create incentives to support reverse capacity building. It is good public policy. As a nation, the earlier we embrace this idea (that is, reverse mortgages for first-time homebuyers and intentional reverse capacity building), the more secured retirement cash flow will be for most homeowners who may not have enough disposable cash for direct traditional savings. Knowing that there is a reverse mortgage in their future, first-time homebuyers can plan to aggressively build reverse capacity by attacking mortgage principal balance every month with little extra payments. Some would argue that keeping principal robust to generate interest deductions to reduce income and taxes is a good thing in a person’s high-earning years. It is a very persuasive argument and it has merits. But tell your first-time homebuyers to attack principal relentlessly with small extra payments and build reverse capacity because their retirement security some day might depend on it. As intentional reverse capacity building becomes widespread, it may also encourage non-homeowners to view homeownership differently and more favorably because it can be shown that homeowners can amass a six-figure nest egg via home equity faster than through traditional savings methods. The circumstances of two couples I served in August 2003 convinced me of the power of this idea. In an October 2003 article I wrote, “The Fate of the Glenns: Your Equity or Your Freedom” in The Mortgage Press, I told their stories. Here is the gist: Paul and Paula Glenn*** were at a very low point physically and financially. To save their home, their loan officer sent them to me for a reverse mortgage solution. Because of their large forward lien and the lower county-by-county FHA (Federal Housing Administration) loan limits at that time, I couldn’t help them. They probably lost their home. By contrast, John and Abbie Stevens***, also weighed down by financial and health problems, had sufficient home equity. We were able to pay off their creditors and leave them with $20,000 in a growing HECM (home equity conversion mortgage) line of credit. They had sufficient cash for groceries and for their medications in the comfort of their home. My experience with the Glenn and the Stevens families persuaded me that home equity, tapped judiciously through reverse mortgages and other equity take-out products, will play a critical role in retirement cash flow management in this century and beyond. If you can buy a home with the understanding that it is also a pillar of your retirement security and you plan to hold on and build home equity one mortgage payment at a time, you will be fine, even if Wall Street goes off the cliff again. The Taiwanese seem to have grasped this idea from the get-go, and they plan to put it into their reverse mortgage model, slated for rollout later this year. On Dec. 16, 2009, Taiwan held a major reverse mortgage conference in Taipei City. Invited were many reverse-thinking folks from government, business and academia. One of the designers of our 20-year-old HECM program was invited to share the American experience. The Taiwanese are thinking more holistically about reverse mortgages. To encourage Taiwan’s growing elder population to use reverse mortgages, they may be subsidizing their program more generously than we have ever done here in the U.S. They believe its social and economic benefits will more than pay for the subsidy their government will provide. Again, Professor Chang: “If the policy [reverse mortgage] is carried out successfully, it will ease the government’s financial burden and have a positive impact on the local real estate industry.”* Taiwan’s approach contrasts with our government’s tepid support for our HECM program, as shown by Congress’s refusal to give the FHA $800 million subsidy it asked for in June 2009 to shore up the HECM insurance fund because of falling home prices. For 20 years, the HECM program has been a success, without a need for public subsidy, thanks to hefty mortgage insurance premiums, conservative actuarial assumptions and robust house prices for much of that period. When our financial system broke down in 2008 and property values crumbled, HECM insurance risk managers figured an $800 million subsidy will help maintain the program. Congress’s knee-jerk turn-down forced FHA to slash HECM cash advances by 10 percent in October 2009, as well as recent principal limit cuts and an insurance premium increase. These cash advance cuts and insurance premium increases are sapping demand for HECMs and depressing origination activities in an industry that could supply cash to help Congress deal with escalating entitlements and mounting national debt. It is penny smart, dollar dumb. You do not have to be a rocket scientist to understand that if we encourage more seniors to use their reverse capacity through reverse mortgages, just as Taiwan plans to do, they will be using their own assets. If we discourage them, as Congress seems to have done by refusing a small subsidy relative to the multi-trillion-dollar bailout of Wall Street, they will turn to far more expensive public sources for supplementary income. At a time of rampant national, state and local governments’ debts, approving FHA’s HECM subsidy request was the rational option, but Congress blew it. We may have the most advanced reverse mortgage program in the world, but we have something to learn from Taiwan. Notes ►*“Cabinet will finish reverse mortgage study next year” by Ted Yang, Taipei Times (Dec. 17, 2009, page 12. ►** NRRI Fact Sheet No. 1, March 2010. ►***Names made up to conceal identities. Atare E. Agbamu, CRMS is author of Think Reverse! and more than 130 articles on reverse mortgages. Since 2002, he writes the nationally distributed column, Forward on Reverse. Through his advisory, ThinkReverse LLC, Agbamu advises financial professionals, institutions, and regulators across the country. In a 2007 national report on reverse mortgages, AARP cited Agbamu’s work.