Research Proposal on "Reverse Mortgage"

Research Proposal 17 pages (4594 words) Sources: 30

[EXCERPT] . . . .

Reverse Mortgage: Comparison of Spain, The United Kingdom, The United States and the Italy

The reverse mortgage is described as a "hot product" in the report of Fessler (2008) entitled: 'How Reverse Mortgages Could Help fund Your Retirement' since reverse mortgages "offer older investors a change to earn monthly income while they wait for the housing market to stabilize..." A reverse mortgage is defined as "...essentially a home quit loan that's paid out over time. Banks long ago recognized that some seniors approaching retirement were coming up short on monthly income, and the reverse mortgage was born...." (Fessler, 2008) Fessler states the following of the reverse mortgage: (1) it's a way to tap into a home's equity and receive a monthly check instead of making monthly payments; (2) the loan is paid back when the house is sold due to the owner moving or if the owner dies; (3) Most reverse mortgages have a minimum age requirement. In the case of Bank of America, it's 62 and older; (4) the upside to a reverse mortgage is that seniors can remain in their home, keep title to it and can continue to make improvements and basically do anything else one would do prior to getting a reverse mortgage." (Fessler, 2008)

The reverse mortgage, according to Fessler (2008) does not affect the various "entitlement programs such as Medicare, but Medicaid and other programs such as Supplemental Security Income (SSI) might be affected." The situation of a homeowner's tax may as well be affected by the reverse mortgage. In considering the reverse mortgage, the age of the individual is a factor and it is noted by Fessler (2008) that since people are living longer they should consider that the result would be that they would need "greater and greater sums to fund their retirement." Other factors to consider include whether the individual desires to stay in their home or sell and then buy another home or rent. Fessler does note that the reverse mortgage would be a good way "to receive additional monthly income while you wait for the market to recover." (Fessler, 2008) the downside is that the reverse mortgage "is - after all - debt dressed up as equity. And there's no free lunch: it eventually has to be paid back, either by you or your heirs." (Fessler, 2008)

I. OVERVIEW

The Peterson Institute for International Economics report entitled: "Germany and Italy: Mind the Accelerator!" states that Italy has a highly fragmented banking system "with extensive public-sector ownership, and limited alternative finance for companies and households" (Peterson Institute, 2007) the result is that "bank capital impairment is a very real risk and the supervisory system of Italy is "more centralized and likely will perform better than Germany's BarFin." (Peterson Institute, 2007) the property bubble in the United States is stated by the Peterson Institute to be nothing in comparison to the United Kingdom and Spain's and states additionally that "while direct property market spillovers are rare across borders, general liquidity reduction for real estate investment could hit these markets." (Peterson Institute, 2007) the Peterson Institute states that "Spain is at the greatest risk" and the United Kingdom is "at the least risk." (2007) the recovery in Italy are stated by the Peterson Institute to be unsustainable with Spanish real estate bubbles "significant" in nature. (2007)

II. POVERTY AMONG ELDERLY HOMEOWNERS

The following figure lists the poverty among elderly homeowners before and after home equity conversion in the countries of Spain and Italy.

Poverty among elderly homeowners before and after home equity conversion

Base income Imputed rent Moving Rev. Mortgage

Spain 32%

Italy 18%

Source: Lefebure, Mangeleer, and Bosch (2006)

Atkinson (0.5) inequality indices before and after home equity conversion

Base Imputed rent

Sale+Buy

Rev. mortgage

Spain 0.153 0.124* 0.138* 0.118*

Italy 0.165 0.152* 0.166 0.153*

Source: Lefebure, Mangeleer, and Bosch (2006)

The work of Lefebure, Mangeleer, and Bosch (2006) entitled: "Elderly Prosperity and Homeownership in the European Union: New Evidence from the Share Data" states that the "elderly population often combines low household income with high ownership rates" and additionally that the addition of a rate of return to home values "significantly reduces the poverty rates of the elderly, particularly in Southern and Central Europe." (Lefebure, Mangeleer, and Bosch. 2006)

The poverty rate is lower in the United States than in the UK where it is approximately 25%. In Italy the over 65 years of age poverty rate is lower as it is in the United States. The population in the country of Italy is reported as aging and it is stated that it is known from "basic life cycle theory (Modigliani) that saving and spending patterns change across the life cycle, with the propensity to borrow against future income in order to buy now declining significantly among the over 50s, and since it is increasing consumer credit that drives retail sales growth in the dynamic internal consumption economies, then it is highly likely that ageing will now act as a drag on sales growth in countries like Italy with very high median population ages (43, along with Germany and Japan). As we can see in the chart below (which comes from the U.S. Census Bureau database), Italy's median population age has been rising steadily, and at a very rapid rate (over 1 year's increase in median population age for each calendar year, of course historically this type of rapid ageing is quite unprecedented), with the only real substantial unknowns between now and 2020 being life expectancy, which may accelerate more than anticipated (in which case the population ageing will be even more rapid), and immigration, which will slow ageing down a bit." (Hugh, 2008)

Italy Median Ages

Source: Hugh (2008)

III. BANK of ITALY

In an address given by Ignazio Visco, member of the board, Bank of Italy at the 'Luxembourg Wealth Study: Enhancing Comparative Research on Household Finance' in Rome in July 2007 it is stated as follows: "As the assembling and standardization of national data sources is now complete, this LWS final conference marks the conclusion of the project. The next stage, as I understand it, will be the release of the LWS database to the research community. It contains a wealth of information on households' net worth and asset portfolio composition, as well as on demographic characteristics, consumption, expenditures and sources of income." (Luxembourg Wealth Study, 2007) Additionally stated is: "According to the Survey of Consumer Finances, the ratio of real assets to household disposable income in the United States rose from 3.7 in 1992 to 4.8 in 2004; in Italy, according to the SHIW, from 5.3 in 1993 to 6.3 in 2004. This is clearly a pattern shared by many other countries. On the other hand, net financial assets show a much more moderate trend. Overall, although time series of the aggregate level of household net worth still leave much to be desired (and the Bank of Italy is currently in the process of overhauling the estimation of Italian wealth figures, with results that will be presented in another conference later this year), there seems to be little question that over this long period wealth has increased at higher rates, for many countries much higher rates, than household disposable income." (Luxembourg Wealth Study, 2007)

Visco additionally states that there is the possibility that there: "...may be merit in considering the changes in shelter costs for owner-occupied housing as part of general consumer price changes. In this case, one should conclude that the prices of housing services have gone up substantially compared to other consumer goods and services. A part however, and possibly a significant part, of housing expenditures is clearly of capital-good nature. One should also then conclude that in these years house owners have been able to extract substantial rent from their accumulated real estate (and then the related questions would be: What determined the rent? Who has gained from the relative price changes? And at whose expense, at a country level and globally?).Anyway, in the first case we have an issue of relevance for monetary stability, in the second for financial stability, especially as house prices have been moving faster in relatively short periods of time and the larger house values have been used as collateral in financial deals. Clearly the LWS data could help substantially in answering some of these questions, comparing the experience of different countries and taking into account the presence of borrowing constraints as well as differences in house ownership. On the latter, it is striking to see how widely home ownership rates differ between countries: in 2000, while in the United States and in the United Kingdom about two households out of three owned their homes, in Germany, in the Netherlands and in Sweden the proportion was 40 to 60 per cent, in Italy about 75 per cent, in Greece and Spain 85 per cent." (Luxembourg Wealth Study, 2007) in summary, Visco states that homeowner statistics are as follows:

Country Homeowners

1) United States 33 1/3% of households

2)… READ MORE

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