Reverse Mortgages for the Poor

An email sends along this story from Bloomberg:

Japan to Offer Reverse Mortgages to Elderly Poor, Nikkei Says, by Tak Kumakura, Bloomberg: The Japanese government will start providing reverse mortgages to elderly people who need financial help, the Nihon Keizai newspaper reported, without saying where it obtained the information.

From April next year, the government's Ministry of Health, Labor and Welfare will lend money to people aged 65 or older, using their homes as collateral. The government will sell the houses after they die and recover the borrowed money.

The move would help reduce welfare expenses for the poor, which total 2 trillion yen ($17 billion) annually. About 20,000 people, or 5 percent of the elderly people who receive welfare payments for the poor, own real estate, according to the newspaper.

If half of those who qualify receive help through reverse mortgages, the government could save 10 billion yen a year. The mortgages would apply to properties worth 5 million yen or more, the newspaper said.

The email adds:

This is fascinating and innovative use of the state. [It] [c]ombines freedom of choice and use of the market, provides dignity to aid recipients, eliminates intermediaries & rentiers. Of course there is a danger than the homes will not be maintained, will be eyesores for neighbors, will drag down rents of adjacent homes... But in Japan where "shame" and pride police such behaviours more effectively than directive it is not an issue as such... Kind regards...

If I understand this correctly, the income from the reverse mortgage would replace existing welfare payments to the elderly poor which is the source of the government saving, and anything received over and above that amount would augment the homeowner's income. Though poverty may induce people to enter into this arrangement, it doesn't seem like a great deal since the net payment for the sale of the house is what's left over after replacing welfare payments.

Comments

[Blissex]

«Though poverty may induce people to enter into this arrangement, it doesn't seem like a great deal since the net payment for the sale of the house is what's left over after replacing welfare payments.»

This seems to me a classic "honne" vs. "tatamae" situation: it is obvious that this program has certain consequences, and these consequences are intentional.

If the government offers to buy your house, to any comer, there is an obvious self selection problem...

This program is meant to have these effects:

* To attract mostly childless people who have hard-to-sell properties (quite common after a large collapse in real estate values), who are likely to be very poor.

* To give these people more welfare than they would be otherwise entitled, both out of charity and to support consumption.

* Most of these people are probably in the rapidly depopulating rural districts, with villages depopulating fast and elderly people with children know those children don't care about inheriting a rural property. The intent therefore seems to support rural districts in which the ruling party is dominant and which are wildly overrepresented electorally.

* To withdraw from the market, at least temporarily, as much supply of housing as possible to prop up prices.

In other words while elderly couples with descendants will usually be supported by them and then bequeath them their houses, this is a scheme to substitute the state for those couples without or unable/unwilling descendants. Probably a program inspired by confucian piety for the elderly, and by countering deflation.

Then the devil is in the details: do people that have existing not fully paid off mortages qualify? What kind of valuations will be put on those homes (probably quite generous)? How and how fast (probably very slowly) will houses be sold once they are ''inherited'' by the state?

[Blissex]

«The intent therefore seems to support rural districts in which the ruling party is dominant and which are wildly overrepresented electorally.»

Any resemblance to Republican support programs for the thinly populated, heavily republican, 2 senators each, states of the plains is probably not coincidental.

Thinking of it, I wonder what is the geographic impact of the enormously expensive Medicare program enacted by the Republicans recently.

Average age in cities is usually low because young people usually move to cities and suburbs to seek a better life, and older people retire to less expensive places.

Indeed many farms on the prairie are now run by elderly people. I would suspect that the Medicare prescription benefit advantages rural districts with many asset rich but cash poor elderly farmers quite disproportionately...

[anne]

Blissex:

"Thinking of it, I wonder what is the geographic impact of the enormously expensive Medicare program enacted by the Republicans recently."

Hopefully, the impact is substantial for I only wish to have the program strengthened from here. Clever conjecture. Japan is about to gain an awfully conservative Prime Minister, and I am not the least optimistic for her socially.

[anne]

Japan is a single party democracy, unlike any other democracy in single part dominance since the 1950s. Students now and then write on what it is that makes Japan a democracy, and the answers are remarkably desultory.

[Robert]

The French attempt to deal with this problem of "land-rich cash-poor" by selling their property "en viager" which typically gives them a smaller than market value lump-sum, the right to maintain residency in the property until death, along with a monthly maintenance. There is an actuarially correct value, but individual buyer and seller will either "win" or lose", often dramatically, the longer the seller lives.

A reverse mortgage has no such adverse zero-sum outcome, and thus is probably more efficient. And there are social benefits to not being forced to move. A State scheme might also might also more directly benefit the property holder (and to the state's benefit too by reducing assistance reqts) by eliminating or reducing intermediaries, assoc costs, and unsavoury complicated deals that might bounce unsuspecting seniors out of their homes and require state assistance eventually.

Moreover, in the event the property owner lives longer, there may be additional advantage to the State in "forgoing interest" vs. foreclosure and paying housing benefit or senior housing subsidy.

In the US., exclusionary local property taxes that primarily fund local schools typically make such choices untenable anyway, where even if one can afford the house, they can't afford the tax on fixed income.

[Isabel]

"There is an actuarially correct value, but individual buyer and seller will either "win" or lose", often dramatically, the longer the seller lives."

Dramatically is the right word, when one thinks of Jeanne Calment that died age 121, after having sold her house "en viager" at age 90 to her own notary, who was 47 at the time... and died 2 years before her. ;-)

[`Mike]

In its Annual Report on Japanese Economy and Public Finance 2005 the Cabinet Office of Government of Japan already stated that Reverse Mortgages might be helpful (relating to an article from Mitchell/ Piggott from 2004). One of the obstacles to a wider usage of RMs in Japans seems to be the wish of elderly homeowners to leave an estate.
Interestingly, in 2002 the MInistery has introduced a public scheme (System for Loaning Funds to Support Daily Life in the Long Term) - so I wonder what the "new" product in 2007 will look like. Maybe someone knows more about it and could give us some information.
By the way: it is not proven that a subsidized system like in the US is the best solution. In UK and Australia there are functioning markets where there are only regulatory frameworks. But it is very good, that the Government is aware of the problem and is thinking about solutions - there are a lot of countries with similar problems that are more reluctant about discussing the topic.