This would be only natural for central bankers, as wealth effects may be a very relevant factor in determining fluctuations in aggregate demand. Studies on wealth effects have been conducted in recent years, also in the Bank of Italy, making use of household surveys. For a given level of net worth, the wealth effect may be defined as the extent to which household consumption changes in response to a change in asset prices relative to the general consumer price level. Conceptually, this is no different from the old Pigou effect, but while that worked through changes in consumer prices that reduced the "value" of money balances in real terms, we now have asset prices rather than consumer prices as the main factor. While consumer prices may be relatively stable, asset prices could move substantially, and the wealth effect could actually be a destabilizing rather than, as was once thought, a stabilizing factor." (2007) This results in a question of whether a "substantial drop in the relative price of houses might have a significant negative effect on aggregate demand." (Visco, 2007)
IV. GLOBAL CORPORATE TRUST REPORT
Reverse mortgages (RM) are stated to have once been considered "the sole province of poor retirees, a last resort for individuals without adequate retirement savings. How the market is shifting in a way that may portend bigger things to come. RMs are fast becoming the financial tool of choice for house-rich but cash-poor seniors. Prior to RMs, retirees could only access home equity by selling or by taking a home equity loan. With the recent real estate downturn, selling has become a less palatable option." (Global Corporate Trust, 2008) Over 300,000 reverse mortgages are stated to have been originated "during the past five years." (Global Corporate Trust, 2008) This only represents however, approximately "1% market penetration" and it is estimated by the National Reverse Mortgage Lenders Association (NRMLA) that "80% of seniors own their homes and hold about $4.3 trillion in untapped home equity." (Global Corporate Trust, 2008) it is predicted that reverse mortgages will grow substantially in the future because of "demographic trends..." illustrated in the "pending global retirement of the post-World War II baby boomer generation." (Global Corporate Trust, 2008) it is reported that the Bank of New York Mellon 'has been building a sophisticated end-to-end RM platform to support origination and securitization by government-sponsored entities (GSEs) and the private market. This platform, currently being developed in the United States, may eventually be rolled out worldwide as RM-type products take hold in other graying nations." (Global Corporate Trust, 2008) Specific demographic trends are stated among the world's population to be as shown in the following chart labeled figure 4 in this study.
Demographic Trends Among the World's Aging Population
Source: Global Corporate Trust, 2008
It is additionally reported that Italy's over-60 population is approximately 39% of the total population in Italy and by 2025 "more than a third of the U.K.'s population will be over age 55." (Global Corporate Trust, 2008) in fact it is held by experts that "such population shifts will severely strain social insurance programs at the very time seniors will be most dependent on them. McKinsey & Company predicts these trends will create significant downward pressure on household savings and financial wealth accumulation." (Global Corporate Trust, 2008) While presently legislation for reverse mortgages is under consideration in Spain, the United Kingdom has established "home reversion programs [that] allow a homeowner to sell an equity interest in the home in exchange for an equivalent percentage of cash." (Global Corporate Trust, 2008) in the case where the owner sells the full equity of the home the homeowner is allowed to "remain in the home rent free until relocation or death." (Global Corporate Trust, 2008) it is related that a report by Defaqto in "April 2007, "noted that a combination of underfunded pensions, low annuity rates, demographics and pensioner debt, along with high levels of equity in housing stock, will make equity release in the U.K. An important retirement planning alternative." (Global Corporate Trust, 2008) Facts stated concerning the nature of the reverse mortgage as having importance as a tool in financial and estate planning which "coincides with the services provided by many diversified financial institutions" include the following:
Long-term care (LTC). About 60% of people over age 65 will require LTC care during their lifetimes, according to the National Clearinghouse for Long-Term Care Information. RMs could fund a long-term care policy or be used to meet out-of pocket LTC expenses;
Medigap. A Medigap policy is health insurance sold by private insurance companies to fill gaps in the original Medicare Plan coverage. Some Medigap policies cover costs not included under Medicare; and Life insurance. Heirs expecting to inherit childhood homes may be disappointed to learn an outstanding RM will require the home to be sold. One solution: use RM cash flow to maintain payments on an existing life policy or to purchase additional coverage. At death, beneficiaries can use the proceeds to pay the RM loan balance or receive a tax-free equivalent that will pass free of probate. (Global Corporate Trust, 2008)
It is related that "a long list of third-party services are often required to support an RM custodial file as its moves from origination to securitization and beyond." (Global Corporate Trust, 2008) These services are stated to include:
1) Document Custodian. When an RM loan is originated, a document custodian is typically charged with holding a physical collateral file that contains the RM note, the title policy, the deed of trust (depending on the state of origination), the assignment form, as well as insurance and other documents. The document custodian is charged with safekeeping, document review, borrowing base calculations, and reporting. RM custodial duties appear similar to forward mortgages, but they are not. Each type of RM loan may require a different set of criteria and documentation. Some of these loans require holding 26 separate documents, including the credit file and HUD requirements, in addition to mortgage related documents. The Bank of New York Mellon has developed specialized RM loan-custody processes, reviewing, certifying, and warehousing the documents from locations in New York, Texas, and California.
2) Collateral Agent. As custodian, the Bank of New York Mellon safekeeps collateral in segregated accounts and marks-to-market daily to ensure prescribed collateral margins are maintained. The Bank's proprietary collateral management system can process a wide array of transaction types, including tri-party repurchase agreements (both equity and fixed income), portfolio swaps, collateralized loans, and swap collateralization deals.
3) Trustee. A trust indenture mandates the appointment of a trustee to provide a central point of contact and serve as the noteholder's representative. Divergent legal environments influence the role of the trustee and the extent of any administrative duties undertaken; however, the core administrative services remain largely the same. The Bank of New York Mellon's service platform and product suite offer a single source for all trustee needs. Choosing the right trustee could influence an issue's rating as well as its potential performance in the secondary market.
4) Master Servicer. The Bank of New York Mellon currently monitors primary servicing functions for public and private forward mortgages. These duties include monitoring primary and special servicers, acting as back-up servicer, managing payment flows, collecting monthly reports, aggregating and validating loan level data, and customizing investor reporting. As of May 31, 2007, the Bank of New York Mellon was master servicing more than 131,855 loans totaling $25.1 billion (Fitch Ratings, December 4, 2007).RM master services will be added in the near future. (Global Corporate Trust, 2008)
V. THEORY of MODIGLIANI
The work of Philippe Le Goff (2003) entitled: "The Reverse Mortgage: A Solution to Retirement Funding?" states that the theoretical basis of the reverse mortgage or the concept that underpins the reverse mortgage demand "is the consumption and savings lifecycle theory advanced by Modigliani in the 1950s." Or stated more simply the theory holds that "households accumulate a nest egg for retirement and use it to finance their retirement spending, thus cushioning the impact of the income drop that usually occurs at retirement. The theory involves two important assumptions concerning reverse mortgage demand:
1) Seniors living alone are more likely to participate in a reverse mortgage program; and 2) the appeal of a reverse mortgage program increases with age. (Le Goff, 2003)
Payment options are quite varied in the Reverse Mortgage plans and include:
1) lump-sum payments: The homeowner receives the full amount of the loan in a single payment;
2) Line of credit: The homeowner is given free access to funds up to a preset amount and can use them as he or she sees fit.;
3) Periodic payments: The homeowner receives payments for the duration of the reverse mortgage according to a schedule set out in the contract. (Le Goff, 2003)