The ‘house-as-an-ATM’ ex­per­i­ment

China has given four cities ap­proval to of­fer what some will have noth­ing to do with, while oth­ers may find it an an­swer to liv­ing com­fort­ably as they age — the re­verse mort­gage. The fi­nan­cial in­stru­ment that taps into a home’s value has sup­port­ers and de

China Daily (Canada) - - IN DEPTH -

It is an ages-hon­ored tra­di­tion, a tra­di­tion that has been lift­ing many Chi­nese families out of poverty. Now, some see a di­rect threat to that tra­di­tion in a two-year ex­per­i­ment that the city gov­ern­ments of Bei­jing, Shang­hai, Guangzhou and Wuhan have been given the go-ahead to start, and if the ex­per­i­ment is suc­cess­ful, of­fi­cials say it will be rolled out na­tion­wide. It is the re­verse mort­gage, or what some call the “house-for-pen­sion scheme’’.

And the push for it comes down to num­bers: An ag­ing pop­u­la­tion that is in­come­poor and house-rich, and the need to ease the pres­sure they put on a so­ci­ety’s re­sources by un­lock­ing a home’s value, bit by bit, with­out sell­ing it out­right.

At the end of 2013, the Chi­nese pop­u­la­tion aged 60 was 202 mil­lion, or 15 per­cent of the to­tal.

Even though China’s so­cial se­cu­rity fund stood at 1.1 tril­lion yuan ($179 bil­lion) — up from 838.6 bil­lion yuan in 2011 — the pen­sion-fi­nanc­ing gap will hit 68.2 tril­lion yuan by 2033, up from 16.5 tril­lion yuan in 2010, ac­cord­ing to Cao Yuanzheng, chief econ­o­mist at the Bank of China.

When the China In­sur­ance Reg­u­la­tory Com­mis­sion an­nounced the pilot pro­gram for re­verse mort­gages in June, it said, “The scheme pro­vides a new way for old-age care.”

“For old peo­ple who don’t have chil­dren, have prop­erty but lack cash, we of­fer them a choice to turn their fixed as­sets into cur­rent as­sets, to live more com­fort­ably in their own home in their old age,” said Yao Yu of the com­mis­sion.

The same “of­fer’’ has been in ex­is­tence in the United States for more than 25 years, and it has its sup­port­ers and de­trac­tors, some of whom see po­ten­tial prob­lems for it in China.

Yael Ishakis, a loan of­fi­cer and vice-pres­i­dent of First Merid­ian Mort­gage in Brook­lyn, New York, said that one of the rea­sons re­verse mort­gages have been so suc­cess­ful in the US is be­cause the val­ues of homes usu­ally ap­pre­ci­ate and it’s a win-win for all in­volved.

“Be­cause it’s a gov­ern­ment backed pro­gram there is no bank tak­ing a loss when a fore­clo­sure oc­curs,” Ishakis said in an email in­ter­view with China Daily. “How­ever I’m not con­fi­dent the Chi­nese gov­ern­ment is set up for: 1. Ex­pected losses should a se­nior live a longer age or the house de­pre­ci­ates; or 2. Can the heirs ac­tu­ally re­fi­nance upon the death of the par­ent? Are there mort­gage pro­grams set up not to have the fam­ily or an­ces­tral home get fore­closed upon be­cause the bal­ance of the loan be­came too ex­or­bi­tant for the heirs to take on?”

The pilot pro­gram, ac­cord­ing to Sang Yufeng, a mar­ket­ing direc­tor in Bei­jing for the real es­tate bro­ker­age firm Cen­tury 21, a fran­chise of IFM In­vest­ments Ltd, will help stim­u­late the pre-owned home mar­ket.

“Th­ese prop­er­ties will be im­por­tant mort­gage as­sets for in­sur­ance com­pa­nies and can later be used in as­set se­cu­ri­ti­za­tion,’’ Sang told China Daily. An act of kind­ness

The first re­verse mort­gage in the US was writ­ten in 1961 out of kind­ness by a pri­vate sav­ings and loan of­fi­cer named Nel­son Haynes at a small bank in Port­land, Maine. He wrote it for Nellie Young, the wi­dow of his high school foot­ball coach, who was having trou­ble mak­ing ends meet. The aim was sim­ple — to al­low Young to stay in her home af­ter los­ing her hus­band by grad­u­ally draw­ing down on the value of the house.

Eight years later the con­cept of tap­ping into a house’s eq­uity got a boost at a hear­ing be­fore the Se­nate Com­mit­tee on Ag­ing when econ­o­mist and geron­tol­o­gist with Univer­sity of Cal­i­for­nia, Los An­ge­les YungPing Chen — who was born in Jingjiang, Jiangsu prov­ince in 1930 — tes­ti­fied: “I think an ac­tu­ar­ial mort­gage plan in the form of a hous­ing an­nu­ity can serve two pur­poses: First, to en­able older home­own­ers to re­al­ize the fruits of sav­ings in the form of home eq­uity; and sec­ond, to en­able those home­own­ers who wish to re­main in their homes ei­ther for phys­i­cal con­ve­nience or for sen­ti­men­tal at­tach­ment, to do as they wish.”

Soon the idea be­gan to take hold among economists, aca­demics and banks.

For years Chen had been re­search­ing the very is­sues that China is grap­pling with now: an ag­ing pop­u­la­tion that is “in­come­poor and house-rich” and how to ease the pres­sure they put on a so­ci­ety’s re­sources by un­lock­ing a home’s value, bit by bit, with­out sell­ing it out­right.

The idea con­tin­ued to catch on through the 1970s as more and more aca­demics an­a­lyzed its fea­si­bil­ity.

In 1987 Congress au­tho­rized a re­verse mort­gage —now called Home Eq­uity Con­ver­sion Mort­gage (HECM) — pilot pro­gram, and in 1988 Pres­i­dent Ron­ald Rea­gan signed into law the Hous­ing and Com­mu­nity Devel­op­ment Act that pro­posed fed­eral in­sur­ance for re­verse mort­gages.

To date, more than 860,000 HECMs have been writ­ten in the US, in­clud­ing 60,091 in the most re­cent fed­eral fis­cal year, end­ing Sept 30, 2013, ac­cord­ing to the Na­tional Re­verse Mort­gage Lenders As­so­ci­a­tion (NRMLA).

NRMLA says the uptick in “pop­u­lar­ity” of re­verse mort­gages is prob­a­bly the re­sult of two fac­tors: as peo­ple learn more about the tool they are more com­fort­able with it; but, more im­por­tantly, belt-tight­en­ing caused by higher health­care costs and lower re­turns on in­vest­ments.

To­day, more than 34 mil­lion Amer­i­cans are 65 or older and that num­ber is ex­pected to more than dou­ble over the next 30 years to 70 mil­lion, NRMLA says. Al­most four out of five se­niors own their own homes, or 27 mil­lion se­nior home­own­ers in the US.

That amounts to a tremen­dous amount of eq­uity. And at the same time se­niors have the low­est me­dian in­come of any de­mo­graphic group. Also, as se­niors age, their in­comes do not gen­er­ally in­crease, but their needs do. Homes need main­te­nance, chronic ill­nesses re­quire ex­pen­sive care and med­i­ca­tions, old peo­ple in­creas­ingly need help.

Since then the rules of the game in the US have con­tin­ued to change and mod­ify to the point where the cliché gov­ern­ing re­verse mort­gages is “change is the only con­stant”. Most mod­i­fi­ca­tions seem to be aimed at mak­ing them safer for bor­row­ers and in­su­lat­ing them against preda­tory prac­tices.

Stud­ies by the Amer­i­can As­so­ci­a­tion of Re­tired Peo­ple (AARP) have shown that se­niors will sac­ri­fice con­sid­er­able qual­ity of life in or­der to re­main in their homes for as long as pos­si­ble. AARP sur­veys have found that 65 per­cent of se­nior home­own­ers plan to stay in their homes as long as pos­si­ble and 82 per­cent of se­nior home­own­ers who re­quire some level of as­sisted liv­ing pre­fer to re­main in their own home as long as pos­si­ble.

Re­verse mort­gages al­low this to hap­pen. “Se­niors do not have to re­pay the loans un­til they die,” the NRMLA web­site says. “They can never owe the lender more than the home is worth when the loan is due.”

In the US re­verse mort­gage sys­tem, the home-owner can usu­ally re­ceive the cash in a lump sum, a reg­u­lar monthly ad­vance, a “line of credit” to be drawn on at will or any com­bi­na­tion of the three. How­ever the cash is taken, the loan does not have to be re­paid un­til the owner per­ma­nently moves out of the house, sells it or dies. Not for ev­ery­one

The draw­back, of course, is that the amount a home­owner owes gets big­ger ev­ery month, so the fi­nan­cial tool is not wise for ev­ery­one. “If you want to take a dream va­ca­tion, a re­verse mort­gage is a very ex­pen­sive way to pay for it,” AARP ad­vises on its web­site. “In­vest­ing the money from th­ese loans is an es­pe­cially bad idea, be­cause the loan is highly likely to cost more than you could safely earn.”

Robert DeLeonardis, a prin­ci­pal at Fen­wick Keats Real Es­tate, a res­i­den­tial prop­erty and man­age­ment firm in New York City, said re­verse mort­gages make sense for some. “Peo­ple who are cash poor and have eq­uity in a home,” he said. “If you have a dif­fi­cult time mak­ing your pay­ments and you’re get­ting on in years and you want to tap some of the eq­uity in your home.”

DeLeonardis said he and his brother or­ches­trated a re­verse mort­gage for their mother and got first-hand ex­pe­ri­ence with the process.

The two most ob­vi­ous im­me­di­ate ad­van­tages, he said, were his mother had in­stant money in her purse and she didn’t have to make monthly pay­ments any more.

“The dis­ad­van­tages are that your mort­gage goes up ev­ery month,” he said. “You don’t make the pay­ment but it doesn’t mean that the mort­gage stays still. So that has a neg­a­tive im­pact on your in­her­i­tance. So your kids will get less money.”

The two key fac­tors lenders mea­sure by are the owner’s age and the house’s loanto-value ra­tio, that is, how much is al­ready owed on the house com­pared to its mar­ket value.

“Let’s say your home is cur­rently worth $500,000 and you cur­rently have a mort­gage of say 90 per­cent, some­where in the mid $400,000s. You’re likely not el­i­gi­ble, de­pend­ing on your age,” DeLeonardis said.

But sup­pose that $500,000 home had only a $100,000 mort­gage and the owner is of a cer­tain age. Lenders run the ac­tu­ar­ial ta­bles and see it’s a safe bet that when it comes time to sell, there will be enough eq­uity left that the bank will be made whole.

The guide­lines change, how­ever. “My mother has de­fied the ac­tu­ar­ial ta­bles,” DeLeonardis said. “If she went to get a re­verse mort­gage to­day, she wouldn’t be el­i­gi­ble.” De­spite her added years, the loanto-value ra­tio had ac­crued be­yond the limit.

DeLeonardis learned an­other les­son by man­ag­ing the deal him­self. He orig­i­nally got a re­verse mort­gage through MetLife, but that was six years ago. Since then, MetLife has got­ten out of the re­verse mort­gage busi­ness. They sold his mort­gage to some­one else, who in turn sold it again.

“My mom’s loan has been sold three times,” he said, adding that he got into a big ar­gu­ment with the cur­rent holder, who had sent a dec­la­ra­tion of pri­mary res­i­dence form to his mother, who is 81, and be­cause she had failed to no­tice it, much less fill it out or send it in, they were go­ing to con­sider the loan in de­fault.

“It was kind of squir­rely that they would do some­thing like that to an 81-year-old woman,” he said. “That’s not very nice. It prompted a call from me to them and I’m sure that they’ve got­ten other com­plaints.”

Still, DeLeonardis warned, own­ers have to be con­scious that the loan could be sold and some­times oner­ous re­stric­tions and re­quire­ments can be added on. “You’ve got to stay on your toes and be dili­gent,” he said.

Whether the house-for-pen­sion pro­gram will work in China has ex­perts con­cerned for a va­ri­ety of rea­sons. Home own­er­ship in China is capped at age 70 and for count­less gen­er­a­tions, homes have been passed along to next gen­er­a­tions as a ma­jor in­her­i­tance.

“The house is gen­er­ally be­lieved to be the dear­est gift to off­spring and many el­ders pre­fer to spend the rest of their life in their own home,” Wen Jun, a so­ci­ol­o­gist at East China Nor­mal Univer­sity told Xin­hua.

Li Qimin, a 65-year-old re­tired teacher in east­ern China’s Zhe­jiang prov­ince, told China Daily that the re­verse mort­gage is an un­ac­cept­able prac­tice for her. “I could live a de­cent life with my pen­sion. And I would def­i­nitely leave my apart­ment to my daugh­ter,” said Li.

David Reis­cher of legal­ad­vice.com said that a loan-to-value ra­tio of 65 per­cent works well when prop­erty val­ues are ris­ing be­cause the chances are small that the lender will end up with a house that is worth less than the size of the mort­gage. Re­cently, how­ever, prop­erty val­ues have de­clined sub­stan­tially and bor­row­ers are liv­ing longer than pre­vi­ous gen­er­a­tions (and the pre­dic­tions of the ac­tu­ar­ies).

“In China,” Reis­cher wrote in an email in­ter­view with China Daily, “this type of ar­range­ment may be even more risky if the prop­erty is in a bub­ble right now, like many peo­ple sus­pect China is in. The Chi­nese tax­pay­ers will be on the hook for eat­ing any losses for mort­gages un­der­writ­ten to sub­si­dize the older gen­er­a­tion. Young Chi­nese tax­pay­ers will be forced to pay higher taxes to eat bank losses that re­sult from th­ese re­verse mort­gage loans.’’

Guan Jiaoyang, gen­eral man­ager of Wuhan-based Union Life In­sur­ance Co Ltd, said there are two ma­jor clients for re­verse mort­gages — those with sig­nif­i­cant as­sets and those who have no im­me­di­ate rel­a­tives. As a new prod­uct, the ma­jor chal­lenges in­clude the val­u­a­tion of prop­er­ties, the levy of prop­erty tax and the tra­di­tion of par­ents leav­ing their prop­erty to their chil­dren, Guan told China Daily. Not a sure bet

Some an­a­lysts call the Chi­nese house­for-pen­sion project a niche prod­uct fit only for child­less ur­ban se­niors to im­prove their life­styles. Un­like in the big cities where hous­ing is ex­or­bi­tantly priced, vil­lage huts in China’s vast ru­ral ar­eas go cheap and aren’t a sure re-sale bet for in­sur­ance com­pa­nies and banks.

Xin­hua spoke with Yin Shoutang, 71, who lives with his wife, his 91-year-old mother and a grand­daugh­ter in a sub­urb of Wuhan on a monthly pen­sion of 2,200 yuan ($357), which com­pels him to work part-time as a car­pen­ter.

Yin con­sid­ered tak­ing a sec­ond mort­gage on his 110-sq-me­ter house, but the prob­lem is his house is only worth about $32,520. “We may spend all the loan and die home­less,” he said.

One el­derly gen­tle­man in­ter­viewed on the is­sue by The Work­ers’ Daily said sim­ply: “It is not I alone who can make a de­ci­sion on the prop­erty. What would my chil­dren think?”

An ed­i­to­rial in The Guangzhou Daily cau­tioned that toy­ing with an ages-hon­ored tra­di­tion of pass­ing homes down to younger gen­er­a­tions — a tra­di­tion that has been lift­ing so many families out of poverty for so long — could back­fire. “A re­verse mort­gage may only lead to fam­ily dis­putes,” it said.

“The house is my most pre­cious as­set and legacy, and af­ter I die, I must give it to some­one I know and trust,” Xia Wuyi, 70, an un­wed, child­less man in Shang­hai told Xin­hua. Xia, who suf­fers from Alzheimer’s Dis­ease, had cut his own deal to lever­age the value of his house, im­pro­vised out of com­pas­sion and prac­ti­cal­ity — the same way the orig­i­nal re­verse mort­gage came about way back in Maine in 1961.

Xia adopted a lo­cal ped­dler girl as his daugh­ter and promised to leave her the prop­erty if she stuck to her prom­ise to take care of him through his twi­light years. Con­tact the writer at chris­davis@chi­nadai­lyusa.com Hu Yuanyuan in Bei­jing con­trib­uted to this story.

GUILLERMO MUNRO / CHINA DAILY

With­out sell­ing a house out­right, a re­verse mort­gage al­lows a home owner to draw on the value of the prop­erty bit by bit as needed, turn­ing a home, for all in­tents and pur­poses, into a cash ma­chine. The tool has worked well in the US for the last quar­ter cen­tury and now China has given the green light for a house-for-pen­sion pilot it to be tested in four ma­jor cities.

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