While reverse mortgages can have significant potential for many aging parts of the global population, research in a new paper identifies roadblock with universal applications that have kept the resource from flourishing.
Its findings, as reported by Reverse Mortgage Daily, were part of a paper authored by Peter Knaak, Margaret Miller, and Fiona Stewart of the World Bank’s Finance, Competitiveness, and Innovation Global Practice.
Among their findings was that reverse mortgages are taking on new importance due to issues related to the aging of society.
“Policymakers are grappling with the demographic phenomenon of aging societies, a low-interest financial environment that provides insufficient returns on pension savings, and policy legacy issues such as low contribution rates, generous retirement age and early withdrawal rules,” the researchers said. “All these issues affect the replacement rate of pensions and raise the risk of old-age poverty.”
The report states that as traditional pensions continue to fade, policymakers work to facilitate greater household savings behavior.
For economies like the United States, major transitions from defined benefit pensions to defined contribution 401K plans are, “raising the risk of inadequate post-retirement income.”
Reverse Mortgage Daily states that reverse mortgages to be characterized as useful instruments, since those with defined contribution plans like a 401K could allow older homeowners access to housing equity.
“Based on this assumption, a variety of studies find reverse mortgages welfare-enhancing for elderly American homeowners,” the research states. “As noted, these products could also prove beneficial in developing countries with a relatively high level of housing ownership, but where pension coverage and /or incomes are more limited.”
The Home Equity Conversion Mortgage (HECM) program, however, has been the source of regulatory scrutiny, the authors write.
“Over time, U.S. regulators have tightened the rules for the reverse mortgage market in the face of financial distress,” the paper reads. “The reverse mortgage program has undergone several regulatory changes in its 30-year history. In response to customer protection concerns, regulatory authorities created fee disclosure requirements and education safeguards in 1998: potential customers are required to attend counseling by a HUD-approved third party before signing a reverse mortgage contract.”
Additionally, the report states that reverse mortgages are financial tools that have the potential to address retirement savings and diminishing pension programs in the U.S.
The report states there is a gap between the potential reverse mortgage products to address the financial needs of seniors and small markets.
“In this case, reverse mortgages represent more of a wealth management tool for the better-off than an instrument to address old-age poverty,” the paper’s conclusion reads.