Seniors’ Access to Home Equity: Identifying Existing Mechanisms and Impediments to Broader Adoption

It’s one of the biggest paradoxes in personal finance. Homeowners age 65 and older are sitting on a mountain of housing wealth, with the Urban Institute estimating that they have access to more than $3 trillion in extractable primary residence home equity. Furthermore, Fannie Mae’s National Housing Survey^® (NHS) indicates that nearly 37 percent of senior homeowners are concerned about their financial situation in retirement. However, the NHS also reveals that merely 6 percent of senior homeowners are interested in tapping into their home equity to help meet retirement financial needs.¹

So why are older homeowners so reluctant to draw on housing wealth to help secure a more comfortable retirement? In the second of a series of studies on seniors and home equity sponsored by Fannie Mae and conducted by the Urban Institute, Karan Kaul and Laurie Goodman begin to explore this conundrum. Their new working paper describes the various mechanisms that seniors could use to access home equity, identifies impediments keeping them from extracting equity, and offers recommendations for overcoming these obstacles.

The working paper describes multiple mechanisms for accessing home equity, including selling the home and downsizing, using forward or reverse mortgage products to extract equity without selling the asset, and indirectly consuming home equity by underspending on home maintenance. One of the key takeaways from the review of existing mechanisms is that seniors rarely use mortgages to access their home equity. According to one recent study, the proportion of the population age 62 and older using the four primary mortgage channels for equity extraction (home equity lines of credit, closed-end seconds, cash-out refinance loans, or Home Equity Conversion Mortgages) is very low.² None of the four channels had an annual origination rate of greater than 4 percent in any year between 2004 and 2012, with only HELOCs having a rate exceeding 1 percent.

The paper discusses multiple reasons for low rates of home equity extraction among seniors. The single most important factor, by far, is very limited demand for tapping equity, which might arise for two reasons:

• First, seniors typically want to stay financially conservative and avoid debt. This behavior could be related to their desire to leave a bequest or to save for emergency expenses or long-term care. Others might avoid mortgage debt because they’re worried about losing their home.
• Second, continued improvements in health and medicine are allowing more seniors to work and earn well into old age, thus reducing the need to depend on home equity extraction.

Beyond these behavioral factors, structural impediments to equity extraction are also at play, including poor financial literacy, the complexity and high costs of some mortgage products, and fear of misinformation and fraud, particularly with respect to reverse mortgages. Post-crisis credit tightening has also affected home equity lending. As varied as these impediments to equity extraction are, they all ultimately lead to one outcome: enormous untapped housing wealth that represents both a potential solution to the financial strains facing some elderly homeowners and a significant untapped market for the housing finance industry.

The working paper offers several recommendations for easing barriers to home equity extraction, most of which are geared towards addressing structural impediments rather than seniors’ conservative attitudes toward debt or their long-held preferences and beliefs. These recommendations include:

• Improving reverse mortgage financial literacy by introducing the product to individuals at a younger age. This could be achieved by incorporating housing wealth and reverse mortgages into retirement planning. Reverse mortgage literacy might also be improved through enhancements to the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) counseling efforts, via customizing counseling based on the potential borrower’s characteristics and financial needs and by initiating counseling earlier in the borrowing process.
• Reducing the cost of reverse mortgages by simplifying product design, phasing out product options that are rarely used, fostering competition between reverse mortgage lenders, and reducing borrowing costs by improving the liquidity of HECM mortgage-backed securities.
• Improving access to credit by reducing HECM premiums in a risk-neutral manner, such as by commensurately reducing the maximum amount that can be borrowed. This could be achieved by reintroducing a modified version of the discontinued HECM Saver product.
• Exploring the development of, and educating consumers about, new products and alternative approaches for equity extraction. Shared appreciation mortgages and converting a portion of the home into a rental are two opportunities.

Ultimately, no single approach can address all of the complex factors that contribute to seniors’ infrequent use of home equity in retirement. Furthermore, any proposals to address structural impediments by reducing HECM premiums must be studied carefully and, when needed, accompanied by commensurate reductions in risk, particularly given the recent history of losses in the HECM program. Additionally, even if all structural impediments were removed, behavioral and attitudinal barriers would undoubtedly keep many senior homeowners from tapping their housing wealth. Finally, liquefying home equity is not an option for the roughly 20 percent of senior households who rent.

Despite these limitations, the multiple options for expanding access to seniors’ housing wealth discussed in the working paper offer significant promise both for improving retirement financial security and for unlocking a largely untapped lending market.

Karan Kaul
Research Associate
Housing Finance Policy Center
The Urban Institute

Laurie Goodman
Codirector
Housing Finance Policy Center
The Urban Institute

Patrick Simmons
Director, Strategic Planning
Economic & Strategic Research Group
Fannie Mae

February 28, 2017

The authors thank Stephanie Moulton and Ellen Seidman, as well as participants in the October 19, 2016, Urban Institute Roundtable, for helpful comments on the Working Paper upon which this FM Commentary is based. Of course, all errors and omissions remain the responsibility of the authors.

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic & Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR Group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR Group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

In addition, the views expressed here should not be attributed to the Urban Institute, its trustees, or its funders. Fannie Mae provided funding to the Urban Institute to support development of the Working Paper upon which this FM Commentary is based. Funders do not determine research findings or the insights and recommendations of Urban Institute experts. Further information on the Urban Institute’s funding principles is available at www.urban.org/support.

¹The NHS results reflect the proportion of homeowners aged 65 and older who are either “somewhat” or “very” concerned about their personal financial situation in retirement or “somewhat” or “very” interested in tapping into their home equity in retirement. Data were collected in the second quarter of 2016. Detailed NHS results are available at National Housing Survey Q2 2016 Topic Analysis, “Older Homeowners: Accessing Home Equity in Retirement.”

² Stephanie Moulton, Samuel Dodini, Donald R. Haurin, and Maximilian D. Schmeiser (2015). “How House Price Dynamics and Credit Constraints Affect the Equity Extraction of Senior Homeowners,” Finance and Economics Discussion Series 2015-070. Washington: Board of Governors of the Federal Reserve System.