Home equity could make a difference for long-term care funding (but there’s a catch)

As the U.S. population grows older with each passing year, looking for new and novel ways to fund long-term care for the aging population could include home equity. A reverse mortgage can certainly play into this, but another growing dynamic is the divide between higher- and lower-income homeowners.

This is according to “Housing America’s Older Adults 2023,” the latest edition of a report published by Harvard University’s Joint Center for Housing Studies (JCHS) in December.

As the gap between high- and low-income homeowners widens, the equity they’ve built up in their homes could make a difference in the equation. But unlike higher-income seniors, lower-income homeowners are more likely to maintain an existing forward mortgage on their property, which could make a Federal Housing Administration (FHA)-backed Home Equity Conversion Mortgage (HECM) more attractive.

“Even though HECMs were established specifically to ensure that older adults can convert their equity to cash as they age, they are less common than other products designed for accessing equity,” the report reads. “According to data from the U.S. Department of Housing and Urban Development (HUD), only about 64,500 HECMs were originated in FY2022.”

The situation worsened the following year, as HECM endorsements dropped roughly 50% in 2023 compared to data from the prior year according to FHA’s 2023 Annual Report to Congress.

Research conducted by both Chris Mayer and Ohio State University (OSU) researcher Stephanie Moulton suggested that “tighter underwriting standards and borrowing limits established in the wake of the Great Recession, combined with the exit of several major lenders from the reverse mortgage market, served to reduce originations from earlier levels,” the report said.

A lack of both “awareness and understanding of HECMs” alongside seniors’ aversion to tapping home equity or their desire to hold it in reserve to protect against a severe financial shock may also suppress demand, the explanation stated.

Lower-income seniors may also find it challenging to use reverse mortgages when attempting to access home equity, and these challenges can be compounded by other factors.

“[I]ndividuals who have faced a lifetime of barriers to accessing a quality education, a well-paying job, meaningful healthcare, and stable housing will have fewer financial resources to draw on as they age,” the report said. “The public and private sectors are both crucial to ensuring that the nation’s most vulnerable older adults are able to age with dignity in their homes and communities.”