A few weeks ago, the national government launched the reverse mortgage mechanism. It is a financial instrument aimed at people over 65 years of age, basically a loan with a real estate guarantee. The borrower receives an amount of money that can be in a single disbursement (single draw), in periodic distribution for a specific time (quick regular ties), or in irregular issuance for the rest of his life (periodic lifetime draws). However, the owner can stay living in the house until the end of his days. When the beneficiaries die, the heirs will have to pay the debt with interest, either with the house itself, its sale, or its resources.
Different opinions have been expressed about the advantages and inconveniences of this mechanism. The benefits are associated with the apparent solution of a structural and severe problem, which is the inefficiency of the pension system. The supporting report of the decree states that only 28% of older adults manage to retire1. Given the inconveniences that have been argued, such as the high financial risks and the vulnerability of the borrowers, what is claimed is that it is only an alternative and that, in any case, there is “freedom to choose “2, the first part of the text examines this idea.
On the other hand, one of the barriers identified for implementing this mechanism is the culture of inheritance, which international experience has shown us that the heirs can rarely recover the property precisely because of the high financial costs involved in reverse mortgages. The second part analyzes this situation in a context of inequality like ours.
The supporting report proposes the main social problem behind this mechanism, the so-called hidden poverty, which refers to those senior households with low incomes, most of whom lack a pension but who own a home, generally well located. Two elements stand out; the first is that the middle and popular sectors have been doing mobilizing housing as a substitute for assistance for a long time. Secondly, we should think about the role of the real estate sector in this equation, particularly about an instrument that is much less discussed in public opinion and that is part of the draft decree: the real estate annuity.
Freedom to choose? A business in very asymmetrical conditions
As some analysts have pointed out, reverse mortgages are agreed on unequal conditions; it is a financial business between an elderly and poor person and a banker or investor on the other.
Studies in other countries have shown that people who access a reverse mortgage are generally in a vulnerable condition. For example, in the United States, the typical characteristics of those who access this mechanism are the elderly (over 80 years of age) with low income, alone, in poor health, but yes, owners of a property, and better if it is of high value and well located3. In this way, the borrower assumes all the risks with his property and agrees to very high-interest rates. Reverse mortgages generally have higher interest rates than any other financial product.
Through the reverse mortgage, wealth is transferred to the financial (and real estate) sector at the expense of the impoverishment of the oldest in the framework of a business in a completely asymmetrical scenario, where the need is the primary motivation borrower4. As stated by Acosta5, in an average mortgage, you sometimes end up paying three times what you borrowed, but in a reverse mortgage, the bank pays only a third of the house (at most half). It is like paying three times for the house but selling it for a third. So, the banks, investment funds, or insurance companies, in most cases, are left with a considerable profit: the interest, almost always with a part of the house for free and, in addition, with the real estate valuation.
How could it be a redistributive mechanism? Perhaps if the State operated it, it would work in South Korea6, also articulated with housing policy. Even in the United States, 90% of reverse mortgages have been arranged under a state-insured program of the Federal Housing Administration7. In our case, the instrument could be operated by the National Savings Fund (FNA), agreeing on the business under fair conditions. It can even work in coordination with Colpensiones8 so that the beneficiaries of the profits from this mechanism are the affiliates, and we can improve it. Pension conditions to more people. In addition, it is possible that the properties that are received as dation in payment can be sold at meager prices to FNA savers, or in any case, join the social housing policy. In this way, we do not transfer more wealth to the richest. Still, we build a fair mechanism to improve pension conditions with assets and articulated pension solidarity and social housing system.
Will I leave my children without an inheritance? Calm down. The best legacy you can leave them is education.
As we saw in the previous section, it is not entirely true that those who opt for this mechanism are free to choose. Often, it will be the only thing they can do to have an income in the face of aging and impoverishment. One consequence of this decision is that it limits the owners’ ability to transfer their properties to their heirs.
For some economists9 (mainly Piketty), heredity is a mechanism that reproduces inequalities since those who accumulate a lot of wealth transfer it from generation to generation, reproducing the social class system. And this is true. But it is also true that the reproduction of classes operates at both ends of the social structure. Wealth is transferred from generation to generation, yes, but so is poverty, which partly explains the persistence of inequality.
In a country as unequal as ours and with so few opportunities for social advancement, particularly for the middle and popular sectors, being able to leave an inheritance to children is conceived by households as an intergenerational social mobility strategy, sometimes the only possible. Of course, Minister Malagón affirmed, as many Colombians do, that “the best inheritance that one can leave one’s children is education.” Well, unfortunately, this is less and less true. Several studies on social mobility show that, despite the general improvement of educational achievement in the passage from one generation to another, social rewards have not increased, and education does not necessarily contribute to obtaining better jobs10. This evidences the growing precariousness of labor markets and the consequent low return on education.
In such a way that for a family that could not finance their children’s higher education and preferred to invest in housing, inheritance is sometimes the only possible intergenerational social mobility strategy. This will not ensure a better future for your children either, but it will make it easier for you to access housing. When all social security systems fail (employment, pension, housing, education), the only thing left is family solidarity, and in this, intergenerational transfers play a significant role.
Housing is already mobilized as a pension at a lower social cost.
One of the objectives of this instrument is that older adults can use housing as a substitute or complement to their pension. The enormous weakness of our pension and social security system has forced the popular sectors to resort to their homes as a pension for a long time. Within the framework of my doctoral thesis12, I interviewed 388 homeowners in consolidated informal neighborhoods, most of them older adults, of whom 67% obtain resources from their homes by renting rooms, apartments, or premises, the installation of their own business, or the production of goods that they sell or market in different ways. For many of them, the resources they obtain thanks to their housing is their only income13.
By mobilizing their home as a productive asset, they not only supplement their income in old age but also generate a supply of rental housing, which, although informal, is very important for young households that cannot access other forms of housing, often their children (once again family solidarity solving the failures of the social system). All this without risking the inheritance. In my opinion, they manage to solve their absence from a pension more efficiently, at a lower cost, and with more solidarity, although in no case without problems.
In general, little reception of this mechanism is expected in the popular sectors, but there are still problems with the legality of property titles. The reverse mortgage has had little reception in most countries in which it has been implemented14, in the United States, only 2% of the potential demand has opted for this product15. The culture of inheritance, the aversion to debt, the high formalization and insurance costs, the financial risks, the complexity of the instrument are some defining elements of the low demand. And it is that in general, it is an instrument that enjoys a bad reputation, indeed for some reason.
And the role of the real estate sector?
Finally, there is concern about the role of the real estate sector. The Vice Minister of Housing Carlos Ruiz affirmed that it would surely not be the banks that would operate this mechanism, but the investment funds, the insurers, and the real estate companies16. Why would the real estate sector be interested in this product? The decree states that the reverse mortgage is mainly aimed at older adults in hidden poverty, homeowners but without enough income to live on. Studies that have addressed this phenomenon have shown that this type of poverty is located in central and pericentral areas such as Usaquén, Barrios Unidos, Teusaquillo, and Chapinero17. Locations in the process of valorization and urban renewal.
Another instrument appears here that introduces the same decree. Still, about which little has been said, it is called the Real Estate Life Annuity (which is not the same as the reverse mortgage in the form of life provisions), and which consists of a sale, through which the owner transfers ownership of his home in advance (I repeat, it is not a mortgage but a sale) in exchange for a life annuity and the guaranteed possibility of a usufruct also for life. Suppose we add to this that, as we said, the people who access these mechanisms are closer to 80 years of age. In that case, the real estate business is round: they anticipate purchasing a very cheap house in a central area of the city very well for a few years located, that is, a land on which they will be able to build a highly profitable real estate project.
The reverse mortgage and the real estate life annuity are, in my opinion, regressive mechanisms that reproduce inequalities, which are based on the transfer of assets to the financial and real estate sector at the expense of the impoverishment of the oldest, and impoverishment caused by a pension that also consists of transferring part of the savings of the workers and their yields to the same sectors.
