Racial wealth gap and reverse mortgages
Reverse mortgages are financial tools that allow homeowners to access capital by using the equity in their home as collateral. They are a way for people 62 and older to tap into the value of their home, unlike other methods, such as a home equity loan or a home equity line of credit (HELOC). Home equity conversion mortgages (HECMs) are the most common type of reverse mortgage. These loans, backed by the US Department of Housing and Urban Development (HUD), have become increasingly popular as a way for older homeowners with significant equity in their homes to boost their income.
Consumer advocacy groups and the federal government have warned of scams and predatory lending related to reverse mortgages, especially since these products are aimed at seniors. Additionally, researchers have reported racial gaps in accessing and using this financial tool. Given the growing racial wealth gap and the close connection between property and wealth in the United States, questions about what role reverse mortgages play in shaping this situation and how they reflect other societal and structural differences are now beginning to be investigated.
Key points to remember
- Reverse mortgages have become a common financial tool that allows older homeowners to access capital by tapping into the equity in their home.
- The popularity of the tool differs by breed. According to the Urban Institute, the social policy think tank, reverse mortgages are most popular with white and black homeowners. In contrast, Hispanic and Asian homeowners account for a larger share of “term” home equity loans.
- People’s decision-making regarding reverse mortgages appears to be influenced by race.
- The researchers said the link between reverse mortgages and race is understudied, but they can replicate issues around social and economic opportunity.
Use of reverse mortgages by race
A 2020 paper by the Urban Institute, a social policy think tank based in Washington, D.C., presented the demographics of HECM borrowers, drawing on data released under the Home Mortgage Disclosure Act, a law passed by Congress in 1975 to give consumers access to mortgage data.
Urban Institute researchers Karan Kaul, Laurie Goodman and Sarah Strochak found that the popularity of reverse mortgages varies by race. Specifically, in 2018, white and black homeowners accounted for a larger share of reverse mortgages than term equity loans. Hispanic and Asian homeowners, on the other hand, accounted for a larger share of term home equity than reverse mortgages.
The researchers also pointed out that the number of reverse mortgages was surprisingly low. With older homeowners holding a large amount of home equity and worried about their finances, they noted the decline in reverse mortgages from 2011 to 2018 was counterintuitive.
In 2018, according to the Urban Institute, white borrowers took out 77.7% of all reverse mortgages; Black borrowers contracted 7.2%; Hispanic borrowers contracted 5.8%; Asian borrowers contracted 1.7%.
From 2018 to 2020, appreciating home prices and low mortgage interest rates prompted more homeowners to unlock equity in their homes, according to another report from the Urban Institute. But almost all of the increase in equity loans went to white homeowners. In contrast, equity loans to black homeowners have declined, threatening to intensify the racial wealth gap.
Reverse mortgages may be understudied, researchers say, but there’s reason to believe there’s a disparate racial impact.
In another review of data released by the Home Mortgage Disclosure Act, researchers affiliated with Howard University found “significant lending disparities” in reverse mortgage underwriting decisions related to race/ethnicity, as well than other factors, such as gender and age. According to the report, the odds of being denied a loan were 107% and 48% higher for black and Hispanic homeowners, respectively, than for white homeowners.
Beyond the possibility of disparate denials, the researchers posit that reverse mortgages worsen social inequalities, in part because the reasons for taking out a reverse mortgage vary from person to person.
A Yale research paper by Danya Keene found, for example, that the decision to take out a reverse mortgage can “replicate” social inequality. The underlying structural makeup of society influences individual decisions about whether to take out a reverse mortgage, the study says, bringing into play concerns about intergenerational wealth and structural barriers.
For some, reverse mortgages are tools that can be helpful in getting the most out of your home’s equity, the report concludes. He quoted Cathy, a black homeowner who had been denied a traditional mortgage and used a reverse mortgage to “take advantage of her own net worth.” For others, according to the report, reverse mortgages are a last resort, used to avoid losing their homes. On this point, he quoted Adanna, a black widow who had taken out a reverse mortgage to avoid foreclosure.
It should be noted that since reverse mortgages must be repaid upon the death of the borrower, these loans have the potential to impact intergenerational wealth.
Are reverse mortgages scams?
Some may be. The federal government has warned that reverse mortgage scams are relatively common. However, predatory loans that are not scams but can be just as harmful to borrowers are of equal concern.
Are reverse mortgages bad?
It is a financial tool which, like other financial tools, can be used well or badly. However, reverse mortgages are also prone to scams and predatory lending practices. You should be scrupulous and look for the best advice when considering one.
Are heirs liable for reverse mortgage debt?
In order for an heir to inherit the house from a relative who had a reverse mortgage, he will have to pay off the debt. Reverse mortgages mature when the borrower dies and the loan must be paid off before the home can be inherited. This is one of the reasons why advocacy groups like CAARMA (Consumer Advocates Against Reverse Mortgage Abuse) warn against predatory reverse mortgages.
Reverse mortgages are a way for homeowners to access capital using the equity in their home. There are others, including a home equity line of credit (HELOC), refinance mortgages, and home equity loans. Given the growing number of seniors in the United States, this tool will likely remain relevant for some time. Since there are signs that race may have an impact on the granting of these loans, the subject merits further investigation.