The Consumer Financial Protection Bureau (CFPB) is concerned about the rapidly increasing default rate on mortgages held by senior citizens. A study done by the CFPB shows that the number of senior citizens with mortgage debt has increased, the amount of debt owed has increased, and default rates have risen.
According to the CFPB since 2011 the percentage of homeowners 65 and older with mortgages rose from 22% to 30% and mortgage balances increased to $79,000 from $43,000.
The most alarming statistic concerning mortgage debt held by seniors is the rapidly growing default rate. Since the banking crisis of 2007 to 2011 homeowners between the age of 65 and 75 who were 90 days past due or more soared from a negligible 0.85% to 4.96%. Homeowners past the age of 75 saw serious delinquencies increase from 1.01% to 5.87%.
Although seniors probably represent a greater risk of delinquency the Equal Credit Opportunity Act makes it illegal to discriminate against a borrower based on age. Seniors have a greater potential for health problems which can result in crushing financial burdens and the inability to work even a part time job. Even healthy seniors still working will eventually find it difficult to maintain employment due to the constraints caused by age. In addition, the death of one spouse could result in a substantial reduction of income due to loss of social security or pension benefits.
Although mortgage debt can make sense for many seniors, if the borrower does not have substantial liquid assets to fall back on to replace lost income, a senior could quickly fall behind with the mortgage payments and have little hope of ever catching up with past due payments. The CFPB did not disclose the amount of savings held by seriously delinquent mortgage borrowers but in all probability, most past due seniors have little in savings.
Ironically, even as mortgage delinquencies soar for many seniors Fannie Mae and Freddie Mac, the government mortgage giants, just made it easier for seniors with retirements accounts to be approved for mortgages. Prior to the new rules, mortgage applicants had to actually withdraw funds from retirement accounts in order to qualify as income. The new rules will allow an imputed income from retirement accounts without requiring that the money actually be withdrawn. These new rules make sense for retirees who have enough income to meet their expense but chose for various reasons not to withdraw funds from their retirement accounts.
The Washington Post has an example from Freddie Mac on how the new rules work.
Take this hypothetical example provided by Freddie Mac credit officials: Say you’d like a new, low-interest-rate mortgage but your debt-to-income ratio doesn’t make the grade. You do have $800,000 sitting in a retirement account that you haven’t touched yet and that could be accessed by you with no IRS penalty.
The good news: Under the federal mortgage investors’ policy change on qualifying income standards, your monthly income could actually be higher for underwriting purposes than it appears to be at first glance.
Under Freddie’s guidelines, the loan officer could use your $800,000 in untapped retirement assets as follows: First, the lender essentially discounts the $800,000 to take into account possible market swings that could reduce what you actually have available. Freddie Mac requires them to multiply your retirement fund assets by 70 percent to arrive at a conservative number. This brings your retirement funds — for underwriting purposes, of course — down to $560,000 ($800,000 times 70 percent).
Next, the underwriter divides the discounted fund balance by 360 to arrive at what is in effect 30 years’ worth of monthly drawdowns from the fund — in this case, $1,556 ($560,000/360 equals $1,556). The lender then can add the $1,556 to your current Social Security, pension and other verified qualifying income for the purpose of computing your debt ratio.
You may never have to draw down even a dollar from your retirement funds to pay the mortgage, but the fact that you have easily accessible financial assets available to do so allows the change to the underwriting equation.
In the past, government efforts to increase mortgage lending often resulted in making loans to applicants without the ability to repay. The new rules for lending to senior citizens actually make sense and allow elderly borrows more options for managing their finances.