Reversing the American Dream

Perhaps the fastest growing new “wealth-management” tool in the US is the reverse mortgage.  The Federal Housing Administration insured 76,351 such mortgages in 2006 compared with 43,131 in 2005.  Industry officials expect around 120,000 reverse mortgages to be signed in 2007.  In 1990, only 150 reverse mortgages were arranged.  Traditional mortgages were the crucial means whereby millions of American families changed, especially after World War 2, from tenants to home owners, thereby realizing what came to be known as the American Dream.  Today’s reverse mortgages are a new means for liquidating that dream.  They would better be described as “wealth-transfer” than “wealth-management” tools.

In traditional mortgages, home buyers pay lenders principal plus interest over many years to build up their home equity, to become genuine owners of their homes.  In reverse mortgages, people who already own their homes borrow from lenders (receiving lump sums and/or monthly payments and/or lines of credit); in return, the lenders then acquire rising equity in those homes.  Eventually the borrowers or their heirs must sell the home to repay the principal and accumulated interest.  Tens of thousands of Americans aged 62 (the legally mandated minimum age for eligibility) or more are now receiving monthly reverse mortgage payments.  They will get them for some or all of the rest of their lives.  In this way, they can supplement the inadequate social security and often modest pension or investment income they must depend upon after retirement.

As all statistics show, the only significant asset that Americans accumulate during their working years is their home.  The economic realities of our times now require drawing down that asset via reverse mortgages to fund their post-retirement years.   They will thus not leave their homes to their children.  Meanwhile the mass refinancing of home mortgages by Americans during their working years is also reducing their home equity as they approach retirement.  The combination of refinancing and reverse mortgages is quickly eroding the historically short-lived period of mass home ownership in the US.

The National Reverse Mortgage Lenders Association (NRMLA) reports that its member lenders grew from 370 in 2005 to over 500 in 2006.  Their business has been booming across the country.  The percentage increases in numbers of reverse mortgages signed from 2005 to 2006 were 71.4 % in New York City, 97.1 % in Boston, 157.9% in Coral Gables, and 238.6% in Phoenix.  Such growth rates result partly because sizeable origination fees and interest charges on such loans make them particularly attractive for lenders.  However, the main reason is rising home prices over recent years.  They provided the only positive economic reality for millions of Americans whose security portfolios, if any, have been in tough shape since 2000, and whose pensions and health benefits (current and future) have been reduced or threatened with reduction.  As the negative realities increasingly eat into the cash flows of the fast-rising portion of the population reaching 62, they discover in reverse mortgages a solution for improving that cash flow.  In the smooth yet expectant rhetoric of Peter Bell, president of the NRMLA, “More seniors are recognizing that traditional retirements tools, such as IRAs, pensions and 401(k)s are not providing sufficient income to help fund everyday living expenses and health care.”

No data exist on how many seniors choose reverse mortgages to avoid burdening their children for ongoing support in their final years.  Likewise no data exist on how many of those children will not discover the cost of reverse mortgages until their parents’ estate is debited to repay the reverse mortgage lender.  Yet we know the importance of home ownership to Americans’ sense of well-being.  Sociologists and psychologists have demonstrated the widespread expectation that children will inherit their parents’ homes and be homeowners themselves.  Thus, the social effects, if reverse mortgages continue to soar, are likely to be profound.  To paraphrase poet Langston Hughes, a dream deferred is a dangerous thing, and a dream erased is worse.

Rick Wolff Rick Wolff is Professor of Economics at University of Massachusetts at Amherst. He is the author of many books and articles, including (with Stephen Resnick) Class Theory and History: Capitalism and Communism in the U.S.S.R. (Routledge, 2002) and (with Stephen Resnick) New Departures in Marxian Theory (Routledge, 2006).  This article first appeared in Global MacroScope (at <>).

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