Build Reverse-capacity: HECMs for First-time Homebuyers

Written by Atare E. Agbamu Thursday, 18 February 2010 22:08

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Taiwan has seen the future of retirement cash flow: There is a reverse mortgage in it, and it plans to help its first-time homebuyers think reverse early, a notion I have been advocating here for years.
Chang Chin-oh, a professor of Land Economics at National Chengchi University in Taipei City, Taiwan, recently gave this hint about Taiwan’s evolving reverse-mortgage model:
 
“The program will also encourage young people to start planning a home purchase early for retirement.” Let me repeat: Plan a home purchase early for retirement!
 
In Think Reverse! (2008) and in several articles before the book, 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 the new pillar of retirement security. The retirement-planning industry and policy leaders have been urging Americans to save for retirement for decades. To this sound traditional advice, I add a complementary new call: Build Reverse-capacity!

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.
 
As a nation, the earlier we embrace this idea (that is, reverse mortgages for first-time homebuyers and reverse-capacity building) the more secured retirement cash flow will be for most homeowners who may not have enough disposable cash for traditional savings. It may also encourage non-homeowners to view homeownership differently and more favorably.
 
The circumstances of two couples I served in August 2003 convinced me of the power of this idea. In an October 2003 article (“The Fate of the Glenns: Your Equity or Your Freedom” [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 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 creditline. They had cash for groceries and their medications in the comfort of their home.
 
My experience with the Glenns and the Stevens 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.
 
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 December 16, 2009 they held a major reverse-mortgage seminar 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. They believe its social and economic benefits will more than pay for the subsidy they 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 sharply with our government’s tepid support for our HECM program as shown by Congress’s refusal to give the Federal Housing Administration $800 million subsidy it asked for in June 2009 to shore up the HECM insurance fund because of falling home prices, a result of the Wall Street-led financial crisis we are still living with.
 
For 20 years the program ran successfully without a need for public subsidy, thanks to hefty mortgage insurance premiums and conservative actuarial assumptions and robust house prices for much of that period. When our financial system broke down in 2008 and property values headed south, FHA HECM insurance risk managers figured an $800 million subsidy will help maintain the program at pre-crisis payout levels.
 
The knee-jerk congressional turn-down forced FHA to slash cash advances from HECM by 10 percent in October 2009 (with rumors of more cuts to come). As you read this, a deadly mixture of high government mortgage insurance premiums, lower cash advances, one-product industry monopoly, and poorly-disclosed HECM non-recourse promise rollback (see “An Assault on Fairness …” www.thinkreverse.com) is 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 debts in the years ahead. It is penny smart, dollar foolish.
 
You don’t have to be a rocket scientist to understand that if we encourage more seniors to use reverse mortgages (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 government 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 can learn a thing or two about reverse mortgages and retirement cash flow from the Chinese in Taiwan.
 
 
 
* “Cabinet will finish reverse mortgage study next year” by Ted Yang, Taipei Times (December 17, 2009, page 12)
 
http://www.taipeitimes.com/News/biz/archives/2009/12/17/2003461169
 
** Made-up names to conceal identity
 
 
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