Pressing Challenges in Housing Finance: Credit Access and Seniors’
Mortgage Debt
Highlights
o Even as the housing market recovers, lenders
are implementing overly strict credit standards that exclude creditworthy
borrowers, particularly members of traditionally underserved populations.
o At the same time, a greater proportion of
older homeowners carry mortgage debt, potentially affecting their financial
stability and health as they age.
o Local programs that provide property tax
relief or assist with maintenance costs, along with financing options, can help
older homeowners with mortgage debt.
National measures of single-family housing starts and home values indicate that the housing market has largely recovered since the Great Recession.
Nearly a decade after the onset of the housing and financial
crises, several indicators show that the housing market is recovering. Housing
starts and prices are up and delinquencies and foreclosures are down. Despite
these positive signs, important housing finance challenges persist, including
tightened access to mortgage credit (especially for traditionally underserved
populations) and an increasing number of older homeowners carrying mortgage
debt.1 These are high-stakes challenges that affect opposite ends
of the age spectrum: younger prospective homeowners and older homeowners in or
nearing retirement. Overly strict credit standards that exclude creditworthy
borrowers block access to the wealth-building benefits of sustainable
homeownership. At the same time, those in their 50s and 60s are now carrying
more mortgage debt than did homeowners in previous generations, likely eroding
their financial well-being and their ability to maintain their desired standard
of living as they age and enter retirement.
Demographic trends
make solving these housing finance challenges particularly urgent. Minority
households, whose growing share of the population will drive much of the future
demand for homeownership, are disproportionately shut out of the current
lending environment. At the same time, the aging of the baby boom generation
will increase the number of older homeowners, who, as we have noted, carry
substantial mortgage debt. Both public- and private-sector innovations have the
potential to better bring low-income and minority borrowers into the homeowning
market while also assisting older homeowners, all without compromising safety,
stability, and consumer protection. Various new ideas have been proposed, such
as using alternative credit scoring models, creating targeted mortgage products
and programs at the national and local levels, and replacing automated
underwriting with manual underwriting, which gives lenders greater latitude in
determining a borrower’s ability to repay. Refinancing options and reverse mortgages
may be appropriate for some older homeowners with mortgage debt, and financial
counseling and assistance programs can provide help to those facing financial
hardship.
State of the Mortgage Market
By several national measures, the mortgage market appears to
have largely stabilized and recovered since the Great Recession. In the third
quarter of 2015, single-family housing starts reached their highest level since
the end of 2007, and sales of existing homes exceeded 5 million per month on a
seasonally adjusted annualized basis for 10 out of the previous 11 months.2 The overall value of the U.S. housing market neared $23
trillion, with household equity of $13 trillion and household mortgage debt of
nearly $10 trillion.3
Homeownership remains an important wealth-building opportunity for low-income and minority households, particularly when borrowers have access to safe mortgage products.
Home values rose to their highest level since 2007, due in part
to supply constraints as well as demand; the national vacancy rate for
owner-occupied homes currently stands at only 1.9 percent.4 In the third quarter of 2015, the delinquency rate on
mortgages of one- to four-unit residential properties fell to its lowest level
since the first quarter of 2007, and the percentage of loans in the foreclosure
process was less than half of its 2010 peak of 4.64 percent.5 Recent books of mortgage business have exceptionally low
default rates by historical standards; many loans currently in the foreclosure
process have been there for years, particularly in states with judicial
foreclosure processes.
Although these positive trends point to a market recovery, other
signs, such as tightening credit and the rising percentage of older homeowners
with mortgage debt, indicate ongoing challenges. During the run-up to the
housing crash, getting a mortgage was undoubtedly too easy. Now, it is arguably
too hard. The Urban Institute Housing Finance Policy Center reports that for
purchase loans issued in the past decade, the mean and median borrower FICO
scores at origination have increased 42 and 46 points, respectively. As of
November 2015, the 10th percentile FICO score for borrowers on purchase loans
was 668 compared with the low 600s before the crisis, indicating that the
minimum score necessary to obtain a mortgage has risen substantially.6 As a result, borrowers who would have qualified for a
mortgage in the early 2000s — that is, before the gross loosening of
underwriting standards — no longer do. These tighter credit standards have
particularly affected minority borrowers; the Urban Institute reports that
lending to African-American borrowers was 50 percent less in 2013 than in 2001
and 38 percent less for Hispanic borrowers during the same period.7
Meanwhile, a rising percentage of older homeowners are carrying
mortgage debt even as they approach and enter the traditional retirement age.
According to the Joint Center for Housing Studies of Harvard University, 40
percent of owners aged 65 and older had mortgages in 2014.8
This trend appears likely to continue as the cohort aged 55 through 64 nears and enters retirement. Approximately 46 percent of owners in this age group had mortgages in 2013.9 Older homeowners carrying significant mortgage debt may have to postpone retirement or make difficult decisions regarding spending on food, medical care, and other expenses. They also are less able to draw on equity to supplement their income as they age.10 The causes, consequences, and policy responses to this trend are discussed in greater detail later in the article.
This trend appears likely to continue as the cohort aged 55 through 64 nears and enters retirement. Approximately 46 percent of owners in this age group had mortgages in 2013.9 Older homeowners carrying significant mortgage debt may have to postpone retirement or make difficult decisions regarding spending on food, medical care, and other expenses. They also are less able to draw on equity to supplement their income as they age.10 The causes, consequences, and policy responses to this trend are discussed in greater detail later in the article.
Is Credit Too Tight?
Because lenders have tightened their credit standards, they are
not serving a significant number of low-risk potential borrowers. Borrowers
with less-than-pristine credit and documentation are struggling to get
mortgages. Researchers at the Urban Institute estimate that if lenders had
applied the same credit standards that were used in 2001 — before the loosening
of standards associated with the housing crisis — they would have issued an
additional 5.2 million mortgages between 2009 and 2014.11 They find that between 2001 and 2014, the number of
borrowers with FICO scores above 700 decreased by 7.5 percent, the number with
scores between 660 and 700 declined by 30 percent, and the number with scores
lower than 660 decreased by 77 percent.12
This gap between the projected and actual number of mortgages
issued between 2009 and 2014 may be explained in part by declining demand for
homeownership. Richard Green, senior advisor on housing finance in HUD’s Office
of Policy Development and Research and director and chair of the University of
Southern California Lusk Center for Real Estate, notes that many of the more
than 7 million households who were temporarily locked out of homeownership
after losing their homes during the foreclosure crisis may choose to remain
renters even after they become eligible to qualify for another loan.13 Rachel Drew and Christopher Herbert of the Joint Center
for Housing Studies of Harvard University find that borrowers who were
underwater are particularly likely to prefer renting over homeownership, but
they conclude that otherwise homeownership preferences have not fundamentally
shifted in the aftermath of the housing crisis.14 Green, however,
points out that demographics are working against demand for homeownership — people
are marrying later, and household growth is strongest among minority groups who
traditionally have had lower homeownership rates. Even after accounting for
these demographic trends, Green finds that the homeownership rate is still
about 3 percent lower than it should be, suggesting that inadequate credit
access remains a critical issue.15
One factor contributing to tightened credit standards is
lenders’ reluctance to originate loans sold to the government-sponsored
enterprises (GSEs) Fannie Mae and Freddie Mac. Lenders say they are worried
about the repurchase risk attached to such loans. Also called buybacks or
putbacks, these repurchases occur when a GSE finds that a loan it has bought
does not meet all of its underwriting requirements, qualifications, or
regulations despite the lender’s representations and warranties to the
contrary. Because GSE purchases make up such a large share of the mortgage
market, lenders’ fears about the risk of repurchases can significantly affect
access to credit. These concerns have emerged in the context of new mortgage
origination and disclosure rules established in the wake of the housing crisis.
The Consumer Financial Protection Bureau (CFPB), for example, has implemented
new rules about the responsibility of lenders to assess borrowers’ ability to
repay a loan and about the disclosures borrowers receive outlining the terms of
mortgage loans.16 Some lenders may scale back their
lending out of concern that even their best-intentioned efforts in underwriting
and documentation will not satisfy the requirements of the new regulations.17
The Housing and Economic Recovery Act of 2008 established a new
federal agency in response to the housing crisis, the Federal Housing Finance
Agency (FHFA). FHFA oversees the GSEs and determines whether lenders have
complied with seller and servicer requirements. FHFA may require noncompliant
lenders to repurchase loans and assume their associated credit risks and costs.
Because the kind of loan-level FHFA scrutiny that might result in a repurchase
typically begins when a loan becomes delinquent, lenders may be especially
reluctant to lend to borrowers with lower credit scores. To avoid the risk of
repurchases, lenders may impose overlays — additional criteria, such as
stricter debt-to-income ratios, higher minimum credit scores, or additional
required documentation — that further restrict credit access. A 2015 Fannie Mae
survey of senior mortgage executives found that credit overlays were used by
approximately 40 percent of lenders who sell loans to GSEs or Ginnie Mae and
approximately 60 percent of wholesale lenders. The most common overlays
reported in the survey were higher minimum credit scores and additional
documentation requirements.18 At an Urban Institute/Core Logic
symposium in 2015, Larry Platt, then a partner at K&L Gates, suggested that
overlays were a reasonable response to alternately ambiguous or overly
prescriptive legal requirements for lending and what he considered to be
disproportionate remedies.19 HUD’s Green disagrees, saying that
lenders are unnecessarily concerned about repurchases.20 The Urban Institute reports that although repurchases are
more likely for nontraditional loan products, Fannie Mae and Freddie Mac have
repurchased less than 0.5 percent of fixed-rate, full documentation, amortizing
30-year loans (the predominant type in the current lending environment) issued
from 1999 through 2014, excluding loans originated from 2006 through 2008,
indicating that lenders have little justification for fearing the repurchase of
new originations.21
Nevertheless, FHFA has taken steps to reassure lenders. Since
2012, the agency has revised its Representations and Warranty Framework — the
rules governing a lender’s certification that a loan complies with GSE selling
and servicing requirements — to clarify for lenders when a mortgage might be
subject to repurchase. FHFA has also provided repurchase relief for loans that
meet stated criteria, such as 36 consecutive, on-time monthly payments.22In 2016, FHFA announced an independent dispute resolution
process for repurchase disputes in which a neutral third-party arbitrator
intervenes after the initial resolution processes fail. This process promises
to prevent disputes from continuing indefinitely. FHFA Director Melvin Watt
writes that the independent dispute resolution process, along with the
Representation and Warranty Framework, “will increase clarity for lenders and
will ultimately increase access to mortgages for creditworthy borrowers.”23
Similarly, lenders may restrict Federal Housing Administration
(FHA) lending because of concern over federal enforcement of the False Claims
Act and associated litigation expenses. Lenders must annually certify that
their loans meet all applicable rules and regulations; if they certify a loan
that is later found to violate these rules, the lender has violated the False
Claims Act. The Urban Institute’s Laurie Goodman argues that the uncertainty
and risk of large penalties surrounding federal enforcement has caused lenders
to curtail FHA lending.24 In March 2016, FHA clarified that
lenders will be held responsible “only for those mistakes that would have
altered the decision to approve the loan,” and not for minor mistakes or for
fraud committed by a third party. Ed Golding, principal deputy assistant
secretary for the Office of Housing and head of FHA, writes that with these
changes, “lenders will be able to more confidently participate in [FHA’s]
program and offer access to a wider number of FHA-eligible borrowers.”25
Finally, lenders may also impose overlays to avoid the risk
associated with the uncertain costs of servicing delinquent loans.26 Delinquent loans generally are more expensive to service
than nondelinquent loans. Although lenders can charge higher prices to account
for some of those increased costs, a number of other factors are more difficult
to anticipate, such as the timeline for foreclosure and property liabilities
after a property is conveyed to the lender. Lenders respond to this uncertainty
by tightening credit standards to avoid the risk of delinquency, which limits
access to credit for borrowers with below-average credit scores.27
Lenders can and should manage their risk, but policymakers want
to ensure that lenders do not overestimate their risk of repurchases, legal
liability, and borrower default. As discussed above, the fear of repurchases
and legal liability is largely unwarranted, and federal regulators have taken
steps to clarify how lenders can extend credit while avoiding penalties.
Research suggests that lenders may also be overestimating credit risk.28 A larger group of borrowers with lower incomes and credit
scores can sustain homeownership than are now being served, particularly with
new regulations that eliminate many of the riskiest loan products and
characteristics. A study comparing borrowers who received subprime loans with
risky features (such as high interest rates, points, and fees; balloon
payments; and negative amortization) with borrowers who had similarly low
incomes and credit scores who received loans without risky features finds that
the latter group had much lower rates of default, suggesting that lenders could
safely manage risk and profitably lend to a broader set of borrowers.29 The success and sustainability of state and local programs
targeting lower-income borrowers further supports the case that credit can be
extended to these borrowers without undue risk to lenders (see “Increasing Access to Sustainable Mortgages for Low-Income
Borrowers”).
(Re) Expanding Credit Access
Allaying lenders’
concerns about repurchases and litigation and convincing them to remove
overlays could open up credit access to a significant portion of potential
borrowers without exposing lenders to substantial credit risk. Additional tools
that hold promise for responsibly expanding credit access include new credit
scoring models, new products and policies that target creditworthy low-income
borrowers, and manual underwriting.
New loan products such as Fannie Mae’s HomeReady Mortgage respond to changing demographics, including the rise of Millennials.
New Credit Scoring Models. Reforms to credit scoring models offer the potential to
assess risk in a way that makes credit accessible to more people without
exposing lenders to greater losses. Refining how scoring models account for
different types of debt, or what they might count as evidence of an
individual’s ability to make regular loan payments, may lead to an expanded
pool of eligible borrowers. FICO, the country’s most influential credit scorer,
has reformed its most recent model, FICO Score 9, to differentiate between
medical and other debts. FICO’s proprietary scoring model is not transparent,
but the company claims that the model better assesses individuals with limited
credit histories, known as “thin files.”30 Experian,
Equifax, and TransUnion, the three national credit bureaus, have developed
Vantage Score 3.0, which they claim better scores those with thin credit files.31 This model incorporates rent, utilities, and telephone
payment histories that have been reported to a consumer’s credit file.32 Landlords are more likely to report missed payments than a
history of timely payments, but Experian is now collecting positive rental
data.33 These proposals all promise to
incorporate “credit invisibles,” those with no credit records, and the
“unscorable,” those with insufficient or dated credit records.34 People who have not recently used credit or who have used
credit only from nontraditional sources (such as payday lenders) do not produce
enough collectable information about their spending to generate a credit score
under common models.35 By the standards of more traditional
credit scoring models, an estimated 26 million consumers were credit invisible
in 2010, and an additional 19 million were considered unscorable. Low-income
and minority individuals are disproportionately represented in these groups.
African Americans make up 16 percent and Hispanics 21 percent of the credit
invisible population and only 13 percent and 17 percent, respectively, of the
U.S. population.36
The impact of these more inclusive models, however, is limited
by the willingness of lenders to adopt them. Lenders that sell mortgages to
Fannie Mae and Freddie Mac are bound by the requirements of the GSEs. Fannie
Mae currently accepts only the classic FICO score, but in its “2016 Scorecard
for Fannie Mae, Freddie Mac, and Common Securitization Solutions,” FHFA
directed the GSEs to conclude their ongoing “assessment of leveraging alternate
or updated credit scores for underwriting, pricing, and investor disclosures
and, as appropriate, plan for implementation.”37 Fannie Mae does
currently allow manual underwriting for borrowers who have a nontraditional
credit history, but in those cases other criteria are stricter, such as the
imposition of a maximum 36 percent debt-to-income ratio and the exclusion of
income from self-employment.38 Sources of information to establish a
nontraditional credit report include rental payments, utilities, insurance
payments (medical, auto, life, or renter’s insurance, not to include payroll
deductions), and payment of certain types of bills.39
While FHFA continues to study alternative credit scoring models,
two bills currently before Congress would alter the credit reporting and
scoring status quo. The Credit Access and Inclusion Act of 2015 (H.R. 3035)
would ensure that positive information about rent and utility payments are
reportable to the three national credit bureaus.40 The Credit Score
Competition Act of 2015 (H.R. 4211) would allow Fannie Mae and Freddie Mac to
use any credit scoring model that meets criteria set by FHFA.41
Targeted Products and Programs. Fannie Mae and Freddie Mac have each
recently launched new programs aimed at serving creditworthy low- and
moderate-income borrowers. Fannie Mae’s HomeReady mortgage responds to shifting
demographics “characterized by the rise of Millennials; increased diversity;
and a growing elderly population [with] new household growth… driven by
traditionally underserved segments.” The program’s underwriting standards allow
lenders to consider income from nonborrower household members or boarders. HomeReady
requires a downpayment of as little as 3 percent and allows borrowers some
flexibility on the source of funds used for downpayment and closing costs,
including gifts and grants. Borrowers’ mortgage insurance payments can be
reduced once the loan-to-value ratio reaches 90 percent and canceled when it
reaches 80 percent. The program also targets low-income, minority, and
disaster-impacted areas, placing no income maximum for borrowers purchasing
properties in low-income census tracts and allowing eligibility for borrowers
earning up to 100 percent of the area median income (AMI) who are buying
properties in high-minority and disaster-impacted tracts. Borrowers earning
less than 80 percent of AMI are eligible to use the program in any area. Online
homeownership education courses are required, and postpurchase support is
available to borrowers throughout the life of the loan.42 Freddie Mac offers substantially similar benefits through
its Home Possible mortgage program.43
Extended family households that pool resources have more income
than traditional underwriting methods reflect. These programs attempt to
account for the actual resources available to repay a loan, offering extended
households greater access to credit. An analysis by Fannie Mae finds evidence
that nonborrower household members indeed contribute to repayment; during the
collapse of the housing market, borrowers who lived in extended households and
had negative equity were more likely to remain in their homes than were
comparable nonextended households.44 Demographic
trends indicate that extended family households may become more prevalent in
the future.
Source: U.S. Department of Housing and Urban Development, Office of Policy Development and Research. “Finance and Investment Data — FHA Mortgage Market Share by Loan Count”(www.huduser.gov/portal/ushmc/fi_FHAShareLnCnt.html). Accessed 11 May 2016.
For its part, HUD has stimulated lending through FHA.
Historically, FHA has been a countercyclical force, enlarging its share of the
market during economic downturns, and that was again the case during and after
the Great Recession. According to Moody’s Analytics, FHA activity prevented a
second housing crash as well as the wider economic impacts that would have
followed.45 From fiscal year 2008 to fiscal year
2015, FHA guaranteed approximately 6.3 million purchase loans and 3.9 million
refinance loans.46 FHA has been especially important for
minority borrowers. In 2014, FHA guaranteed the loans of 43 percent of all
African-American borrowers and 44 percent of all Hispanic borrowers.47
FHA balances the need to expand access to credit with the need
to limit taxpayer risk, so FHA borrowers with credit scores below 580 must
compensate with higher downpayments than those with higher credit scores. Any
FHA borrower with a credit score lower than 620 and a debt-to-income ratio of
more than 43 percent goes through a manual underwriting process to determine
whether other compensating factors sufficiently mitigate risk. These policies
allow FHA to serve borrowers with low credit scores without taking on excessive
risk.48 In 2015, FHA guaranteed a larger share
of loans issued to borrowers with credit scores below 640 than it did in 2013.49 FHA’s efforts to expand credit access were boosted by the
agency’s decision to lower its annual mortgage insurance premium, which funds
the agency’s Mutual Mortgage Insurance Fund, by 50 basis points to 0.85 percent
beginning in January 2015. HUD reports that the cut led to increased volume and
had a neutral to slightly positive impact on the insurance fund’s capital
ratio.50 The change appears to have benefited
first-time homebuyers and minority borrowers. In fiscal year 2015, 82 percent
of FHA purchase originations, totaling 614,148 loans, went to first-time
homebuyers, and approximately one-third of all FHA originations were to
minority borrowers.51
Manual Underwriting. Manual underwriting offers a potential avenue to expand
credit in a responsible manner to borrowers excluded by automated underwriting.
Manual underwriting allows a more nuanced assessment of a potential borrower’s
credit history and possibly a more accurate projection of their ability and
likelihood to repay. For example, for a borrower who struggled to pay off
medical debt related to a one-time emergency but paid other debts, rent, and
utilities on time, manual underwriting would allow the lender to consider the
income of multiple earners in the borrower’s household or dig deeper into the
borrower’s credit history. HUD’s Richard Green notes that although automated
underwriting was supposed to create more time for lenders to do manual
underwriting, very little manual underwriting is currently being done — both
because it is time intensive and because manual underwriting lacks the same
safe harbors from regulatory scrutiny as some automatically underwritten loans
have.52 Manual underwriting can be an effective
way to responsibly extend credit to borrowers with no or low credit scores and
who have sufficient but highly variable income (see “Increasing Access to Sustainable Mortgages for Low-Income
Borrowers”).
Older Homeowners and Mortgage Debt
The share of homeowners at or near retirement age who are carrying mortgage debt has increased significantly in the past two decades.
The housing crisis also had a significant impact on many older
homeowners — 1.5 million lost their homes between 2007 and 2011 — and the home
equity that many older homeowners consider their most valuable asset remains at
risk if home prices decline. In December 2011, AARP reported that among people
aged 50 and older, 16 percent had negative equity in their homes and 6 percent
were in foreclosure or were 90 or more days delinquent in their mortgage
payments.53 The CFPB notes that affected older
consumers may have had greater difficulty recovering from the foreclosure
crisis than their younger counterparts due to “increased incidences of health
problems, cognitive impairment, and difficulties returning to the work force.”54
A trend that predated the crisis is the increasing percentage of
older homeowners with mortgage debt and the increasing amount of that debt
(figures 2 and 3).55 These percentages show a dramatic
increase compared with a generation ago, almost doubling for the 65 to 74 age
group and tripling for those older than 75 since 1989.56 The factors contributing to this rise are varied, and
although the trend is cause for concern, not everyone with mortgage debt is in
financial trouble; some portion of the increase could be explained by
households simply choosing to tap into their homes’ equity — often their
biggest asset — in their later years.57 The CFPB,
however, estimated that in 2014, approximately 4.4 million retired homeowners
had mortgage debt other than reverse mortgages or home equity lines of credit,
indicating that a substantial number of these homeowners were in debt for
reasons other than drawing on the equity in their home.58 In addition, older homeowners who take on mortgages to
access their equity may be doing so because of financial pressures such as
health expenses and a lack of pensions, 401(k) balances, or other sources of
retirement income.59Stephanie Moulton of the John Glenn College of
Public Affairs at Ohio State University points out that more research is needed
to better understand why more older homeowners have mortgages and why some are
drawing down their equity.60
Factors contributing to the rise in older homeowners carrying
mortgage debt include the increase in refinancing in the 2000s and trends that
delay equity building, such as buying one’s first home at a later age and
making smaller downpayments.61 When home values increased in the 2000s,
many households took out home equity loans or refinanced as the loans became
easier and cheaper to obtain, sometimes taking cash out.62 Using data from Freddie Mac, Barry Bosworth and Sarah
Anders calculate that average closing costs as a percentage of a 30-year
mortgage fell from 2.5 percent in 1985 to 0.6 percent in 2006, which, along
with low interest rates, made refinancing more attractive.63 From 1995 to 2007, baby boomers (those born between 1946
and 1964) were most likely to refinance, and older homeowners were more likely
than those in other age groups to cash out equity when refinancing. Among those
who took out cash, the average amount exceeded $50,000. The tax deductibility
of mortgage debt increased the appeal of using home equity for various
purposes.64 Moulton notes that recent retirees may
also be less averse to debt than previous generations.65
Note: Chart shows percent of families with mortgages or home-equity loans by age of the household head.
Source: Board of Governors of the Federal Reserve System. 2013. “Survey of Consumer Finances Chartbook.”
Whether an older homeowner’s mortgage debt is cause for concern
depends on the individual’s circumstances, says Lori Trawinski of the AARP
Public Policy Institute. Older homeowners might draw on their home’s equity to
fund modifications that allow them to age in place, help pay for their
children’s or grandchildren’s education, or pay medical expenses — and as long
as they have the resources to make loan payments, they can reasonably carry
mortgage debt. But drawing on equity could be a problem if the mortgage debt
prevents households from being able to pay for other necessities or if the
equity homeowners are tapping is their only resource. Mortgage debt may also be
a problem if the older homeowner faces an unforeseen event that leads to a
decrease in income, such as job loss or the death of a spouse.66 In these cases, mortgage debt can undermine financial
security, reduce retirement readiness, strain monthly budgets, limit
homeowners’ ability to withstand financial shocks such as health emergencies,
and ultimately put homeowners in danger of losing their homes.67
Research indicates that a substantial portion of older
homeowners with mortgage debt face financial hardships. The Joint Center for
Housing Studies of Harvard University reports that half of owners with a
mortgage aged 65 and older pay more than 30 percent of their income for
housing, and 23 percent pay more than 50 percent of their income for housing.68 On average, owners aged 65 and older with a mortgage pay
monthly housing costs approximately three times higher than owners in that age
group who have paid off their mortgage.69 To cope with
debt, and housing costs generally, many older adults make tradeoffs that may
compromise their long-term fiscal and physical health, according to the
National Council on Aging.70 Health problems, and associated costs,
may in turn make it more difficult for homeowners to pay their housing costs.
The current mortgage status of 50-64 year olds suggests that in the absence of
interventions, this is a problem that might get worse.
Local programs that provide property tax relief or help with
maintenance costs can ease overall housing costs and help older homeowners
manage mortgage debt. Many of these programs, such as the U.S. Department of
Energy’s Weatherization Assistance for Low-Income Persons program, have income eligibility
limits.71 The National Community Reinvestment
Coalition’s National Neighbors Silver program addresses the financial
vulnerability of older adults, including housing counseling and banking access,
and the National Council on Aging’s Economic Security Initiative includes
components to help older adults use home equity wisely. For older homeowners at
risk of foreclosure, federal and state initiatives such as the Home Affordable
Modification Program, Home Affordable Refinance Program, Emergency Homeowner
Loan Program, and the Hardest Hit Fund assisted some older homeowners who might
otherwise have lost their homes or faced even greater hardships (see “Programs for Older Homeowners”).
Older homeowners with mortgage debt may be able to improve their
financial situations through financing options. HUD’s Richard Green says that
as long as mortgage rates remain low, older, still-working homeowners should be
encouraged to refinance into 15-year mortgages so that they can hasten
repayment and equity building, ideally paying mortgages off before they retire.72 For other older homeowners, reverse mortgages, which allow
homeowners to access the equity of their home without having to sell or leave
it, may be beneficial. HUD’s Home Equity Conversion Mortgage (HECM) program,
launched in 1989, insures reverse mortgages made by private lenders. HECM
borrowers convert their home’s equity into income that can help pay for medical
costs and other living expenses — even pay off an existing mortgage.73 Moulton notes that about half of HECM borrowers have
existing mortgage debt, which they pay off with their reverse mortgage.74 Recent reforms to the HECM program have made it safer for
both borrowers and taxpayers, says Moulton, particularly limits on the upfront
draw of equity and requirements to ensure that borrowers can pay their property
taxes, insurance, and other ongoing expenses.75 The HECM program
currently serves a relatively small number of older homeowners, but many more
households could potentially benefit from the program. Although FHA endorsed
fewer than 1 million HECM loans between 1989 and 2015, HECM may be an effective
option for some seniors looking to access their home equity.76
Housing Finance for the Future
The state of the
mortgage market has improved markedly since the housing crisis, but the
challenges of responsibly expanding access to credit and helping seniors who
carry mortgage debt, among others, persist. With minority populations making up
an increasing share of new households, the future of homeownership depends in
large part on the ability of the mortgage market to better serve populations
that it does not currently reach. Clarity on regulations and possible penalties
from the federal agencies, alternate credit scoring models and flexible
underwriting, and good-faith efforts by lenders to make sound, profitable loans
to underserved populations could responsibly extend credit access and create
opportunities for prospective homeowners. Meanwhile, the aging of the baby boom
generation at a time when increasing numbers of older homeowners have mortgage
debt threatens many seniors’ financial well-being and retirement readiness.
Access to refinancing programs may offer some relief to the increasing
percentage of older homeowners with mortgage debt, protecting their ability to
age in their own homes without making tradeoffs that reduce their quality of
life. Effectively addressing these housing finance challenges will not only
improve individual households’ financial health and wealth-building
opportunities but also will strengthen the housing market overall.
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