Older Americans and the Foreclosure Crisis
Blog Post
Sept. 23, 2008
This week, as lawmakers race to put together a plan to address the current global financial crisis, there is much discussion about the origins of this crisis in the subprime mortgage market and who is exactly to blame for it. For well over a year now, there have been numerous stories in the media of folks who knowingly bought more house than they could afford and irresponsibly racked up debt ultimately leading to foreclosure. While there are unfortunately some people who went down this route, it is easy to forget in our frenzy to assign blame that there also many individuals and families losing their homes who were just trying to gain a little financial stability for their families and do the right thing.
This point was hammered home last Friday when I attended a forum hosted by AARP on the impact of the foreclosure crisis on older Americans. The AARP Foundation recently released an analysis of the effects of the mortgage crisis on older Americans. My off the cuff impression before this forum was that older Americans would be less likely to be impacted by the foreclosure crisis since many of them either have already paid off their mortgages or have significant equity in their homes. However, unfortunately, this is not the case for hundreds of thousands of Americans over the age of 50. According to AARP’s research, 28 percent of all recent delinquencies and foreclosures at the end of last year were on loans held by older Americans. In total, this represents over 684,000 older Americans. Older African Americans and Hispanics had higher foreclosure rates than whites. They also found that the foreclosure rate for Americans age 50 and over was only 0.24 percent compared to 0.50 percent for Americans under 50. However, despite this lower rate, the loss of a home is still more financially devastating for the elderly than most given that they have less time to recover and often limited incomes.
Another frightening trend brought up during the forum, and highlighted in the work of panelist William Apgar of Harvard’s Joint Center for Housing Studies, is that older Americans are increasingly likely to be carrying a mortgage. 20 years ago, 34 percent of Americans over 50 had a mortgage. Today, 53 percent of older Americans have a mortgage. Combine this with the fact that over 3.5 million elderly homeowners devote over 50 percent of their income to pay for housing and you have a particularly grim picture. It is hard to imagine many of these folks falling into ranks of those who were purchasing McMansions and using their home equity to fund vacations to Paris. Overall, AARP’s research highlights that some of the most financially vulnerable members of our society, such as the elderly and poor, are being hit particularly hard by this crisis.
On a brighter note, in addition to examining the impact of the foreclosure crisis, several panelists at the forum also discussed their ideas for the inevitable reforms that will have to be made in the mortgage market. Michael Barr, a professor at the University of Michigan Law School, offered one intriguing solution in the form of an opt out mortgage. Under an opt out mortgage plan, which is based on principles from the field of behavioral economics, everyone applying for a mortgage would be defaulted into a basic and standard mortgage (think 30-year, fixed rate loan for example), but have the option to opt out into a different type of mortgage if they desire. In order to counter potential lender incentives to get borrowers to opt out into alternative mortgage products that may not represent their best interests, the default plan must be "sticky." For example, what this means is that if borrowers opt out, lenders will be on hook for greater legal liability. If a borrower opts out and ends up in foreclosure, a court would examine whether the lender provided proper disclosure and if not, could modify the terms of the loan. This would provide a strong incentive for lenders to either keep borrowers with the default product or provide proper disclosure if they opt out, reducing the chances for foreclosure (New America will be hosting an event with Michael Barr next month. Check the events section of New America’s website soon for more details!).
The opt out mortgage plan by itself will not fix all the problems with the mortgage market and as Barr himself acknowledges, there are numerous other problems that could arise in implementation, but it is an excellent start. Only time will tell whether the forthcoming bailout plan will stabilize the financial markets, but eventually policymakers will have to turn their attention towards further reforms in the mortgage market. This will need to involve rules that not only discourage both irresponsible consumer and lender behavior, but that also provide effective protections for the most financially vulnerable in our society.