FIAP > Boletín – Recientes > Pension Notes No. 45 – The challenges of Reverse Mortgage as a mechanism for supplementing pensions / May 2020
7 July, 2020
Pension Notes No. 45 – The challenges of Reverse Mortgage as a mechanism for supplementing pensions / May 2020
Reverse Mortgage (RM) is an instrument that enables converting an illiquid asset (such as one’s own home) into a significant income stream for the elderly. Committing one’s own home to a RM could entail a significant increase of between 39% (for middle-income families) and 49% (for the poorest families) in pension amounts.
The RM concept is promising, but its successful implementation is somewhat complex. In general, the degree of penetration of RM is still low, which can be explained by demand and supply issues. Among the problems affecting the demand for RM are cultural factors (the desire to leave an inheritance); the use of the home as insurance (against illness and health expenses); the complexity of the instrument and the loss of social benefits that often occurs when negotiating a RM. Among the problems affecting RM supply are the assorted risks (longevity, increase in property values, inflation, interest rate variations) that investors face, which require a critical mass of RM contracts to be viable, and the need for a deep secondary market to make the instrument more attractive.
Experience shows that the success of a RM program requires a critical mass of clients; specialized and sufficient suppliers for adequate competition and a credible regulator that establishes clear rules of the game that build trust (standardization of contracts, establishment of codes of conduct, stipulation of minimum criteria, maximum interest rates, the right to remain in the home until death, and that the debt cannot exceed the value of the home, etc.); a public agency that grants guarantees on some risks associated with investors and that decisively promotes RM through communicational support and the use of transitory subsidies to owners; and finally, a harmonization of RM with the country’s public policies.
If the successful diversification of the sources of retirement income are among the public policy objectives of countries, then it seems pertinent that policy makers should begin to seriously consider the need for a robust RM market, considering all the aforementioned conditions. Good intentions and approved RM regulations are not enough. The State should decisively promote this market, on both the demand and supply sides.
