The New York Times has published an interesting article on some of the pitfalls of reverse mortgages, which are exhausting inheritances across America:
… a growing number of baby boomers [are] confronting a bitter inheritance: The same loans that were supposed to help their elderly parents stay in their houses are now pushing their children out…
Similar scenes are being played out throughout an aging America, where the children of elderly borrowers are learning that their parents’ reverse mortgages are now threatening their own inheritances.
…Under federal rules, survivors are supposed to be offered the option to settle the loan for a percentage of the full amount. Instead, reverse mortgage companies are increasingly threatening to foreclose unless heirs pay the mortgages in full, according to interviews with more than four dozen housing counselors, state regulators and 25 families whose elderly parents took out reverse mortgages…
There is no data on how many heirs are facing foreclosure because of reverse mortgages. But interviews with elder care advocates, the housing counselors and heirs, suggest that it is a growing problem already affecting an estimated tens of thousands of people. And it is one that threatens to ensnare future generations, as older Americans increasingly turn to their homes for cash…
Reverse mortgages have yet to take-off in a big way across Australia, partly due to the generosity of our aged pension system, which excludes the owner-occupied home from the assets test, as well as the relatively high threshold placed on financial assets.
However, with the Federal Budget facing extreme pressures as the Baby Boomers retire and the tax base shrinks, it is likely that the Government will ultimately move to wind-back pension payments to those with significant assets, potentially forcing more oldies to resort to reverse mortgages to fund their lifestyles.
While such reforms to the retirement system would negate the need for heavy tax increases on the working-aged population, an increased use of reverse mortgages would reduce the amount of money ultimately inherited by today’s workers, potentially leaving some members of the younger generations worse-off.
One often suggested policy option is for Centrelink to provide reverse mortgages, with the money redeemed upon death/disposal of the property. This way, reverse mortgages can be offered at more equitable terms than provided by the banks, with the added benefits of there being seamless inter-action between reverse mortgages and the welfare system.
However, there are also some problems with a government-backed reverse mortgage scheme. Specifically, it would mean even more government support for the housing market. So instead of letting retirees downsize to homes that better suit their needs (freeing-up stock for younger, growing families), they would be encouraged to stay put, helping to keep home prices inflated and resulting in less efficient usage than would otherwise be the case.
