LTC Bullet:  What the HECM is Happening with Reverse Mortgages?

Friday, June 22, 2012 

Seattle—

LTC Comment:  With personal savings, home equity, and private insurance foundering and the social safety net frayed beyond repair, where’s the money for boomer LTC going to come from?  Don’t count home equity conversion out, says Barb Stucki.

[News section omitted.]

LTC BULLET:  WHAT THE HECM IS HAPPENING WITH REVERSE MORTGAGES?

LTC Comment:  Home equity is by far the largest asset seniors own.  With so few aging Americans prepared financially for retirement, many will likely want to, or have to, tap their home equity in old age.  But after the real estate market collapse and its ongoing weakness, what are the prospects now for home equity to buttress boomers’ retirements?

A comprehensive new report from the MetLife Mature Market Institute provides some answers.  According to Changing Attitudes, Changing Motives: The MetLife Study of How Aging Homeowners Use Reverse Mortgages:

[T]the age of those seeking Home Equity Conversion Mortgages (HECM), popularly known as reverse mortgages, has plummeted in the four years since the collapse of the housing market in the U.S.  It also reports that these mortgages, special types of home loans that allow people to draw on home equity without monthly mortgage repayments, have evolved into a way for many older Baby Boomers to help manage urgent financial needs.  Boomers age 62-64 currently represent one-in-five prospective borrowers of the product, which was once associated with a much older age group.

So reverse mortgages, and more generally, home equity conversion are down but not out.  Just where do matters stand?

That’s the question Barbara Stucki, Ph.D., tackled in a presentation to the Washington, DC-based Long-Term Care Discussion Group on June 14.  Dr. Stucki is the National Council on Aging’s (NCOA’s) Vice President for Home Equity Initiatives.  She has a long and distinguished professional history of study, speaking and publishing about home equity and is the author of NCOA’s excellent “Use Your Home to Stay at Home:  A Guide for Older Homeowners Who Need Help Now.”

I listened to Barb’s presentation and took the following notes.  For more, check out her PowerPoint slides at the Long-Term Care Discussion Group’s website here:  Home Equity as a Financial Resource for Aging in CommunityAlso seeSenior Survey: Reversing Views on Reverse Mortgages,” by Maria Wood in LifeHealthPro, June 14, 2012.

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Following are Steve Moses’s notes on Barbara Stucki’s June 14 presentation to the Long-Term Care Discussion Group about home equity conversion (as described above).  Errors, omissions or misinterpretations are his alone.

Home equity is more than reverse mortgages (RMs), which are not the focus of today’s talk.  RMs are just one strategy.  Right now, they’re the only way for a lot of seniors to liquidate equity without selling the home.  We need to have more options available. 

This is a very finite pot of money.  Historically, people have sold homes to pay for nursing home care.  “That was what you did.”  Nowadays, we forget private resources as we focus on public financing.  Her background is in LTC.  How do we get this resource into the mix.

Most people want to stay in the home.  For middle income families, their house may be their only resource. 

Going to talk broadly about home equity, which is her full time job.  Going to share today her personal thoughts.  Not a data dump nor an official statement of NCOA, a non-profit focused on the vulnerable and disadvantaged, under 250% of poverty.

They recently launched a new website:  Home Equity Advisors:  www.homeequityadvisor.org.  Compendium of all sorts of information about how to tap home equity or use the home.  Including RV living.  Information on how to protect equity.  Goal was to put everything on the topic into one spot.  Lots of different websites are listed.

Big picture:  Housing bubble.  Stable for awhile, then insanity from 2000 to 2007, followed by collapse.  But the overall trend is not too bad after you average out the extreme up and down.  We need to look at home equity, not dismiss it.  Compare personal savings, which are much more worrisome.  Negative savings rate for awhile. 

We’re seeing increasing home owner vulnerability.  Home ownership requires maintenance but keeps you connected to a neighborhood.

Slide 6:

  • Limited financial buffer - 40% of homeowners 65+ have incomes under 200% FPL [Federal Poverty Level].
  • Increasing housing debt - 35% of homeowners age 65+ had a mortgage in 2009 versus 24% in 1999 and 18% in 1989.
  • Median remaining years on mortgage = 14.

  • Median outstanding principal = $55,911 (35% of value).

  • Mortgage scams target older homeowners – 45% of callers to the Homeowner’s HOPE™ Hotline who report being victim of a mortgage scam are age 51 and older.
  • Will home equity be available to pay for LTSS if it is used earlier in retirement to manage debt or increase income?

Mortgage holding percent is creeping up.  How will people make the payments?  More and more aging people will be unable ever to pay back.  Potential “train wreck.”

Will resource be there in the future if people using it early to increase their incomes?  Recommendations to use to supplement cash flow abound in ads.  Could see increased nursing home use if people have nowhere else to go.

Reverse mortgage market.  Slow start.  Great optimism beginning 2003 with increase of home values.  2012 HECM loans down to 60,000 level so have dropped by half.  All the major banks have exited the market.  Seeing more creativity now that banks are out of it.

Compare LTC insurance trend that peaked in 2000 with federal LTCI program.  Both had nice upward curves but have now declined.

Raises interesting questions about how we’ll be able to use those private resources.  Clearly risks in the senior market.  Public programs struggling too.  Not easy. 

People burning through cash so not able to pay taxes and maintenance which is a requirement of reverse mortgages.  Finite pot of money.  Part of challenge is how to manage that.

Public/private solution?  If private can’t do it because of risk and government doesn’t want to take on the problem, is public/private solution possible?

Going to talk about reverse mortgage counseling programs.  Every one who takes a RM has to go through counseling.  Unique.  No other product has this requirement.  HUD mandated every counseling session has to include analysis of family needs.

Reasons for tapping home equity:  see slide 10.  A lot of what we know is sensitive to economic solutions.  Used to be main reason was to enhance life style, now it is to pay back debt.

Attributes of clients:  see slide 11.  Covering health costs is much bigger issue at older ages.

Income:  see slide 13.  Less income among older clients.

Net home equity:  see slide 14.  Tends to be the older people who have the most equity.

See slide 16 on research:  House rich, cash poor people are only 4.7%.  Need to think broadly about how and where this might be a solution.  Especially for the moderate wealth group.  These 30% are likely to be more spend-down vulnerable.

Potential public private solutions:  see slide 17:

Use home equity as source of funding instead of Medicaid.  The Administration on Aging (AoA) is looking at people at risk of needing Medicaid.  With its estate recovery requirement, Medicaid is designed as a reverse mortgage program:  benefit up front and only pay at end.  For single people especially as often don’t have the same eligibility protections. 

People are gaming the system.  Why not make it work?  She did study in state of Washington.  How many seniors on Medicaid are homeowners:  only 5% after looking and looking.  Vast majority of seniors are homeowners.  It’s not like Medicaid beneficiaries never owned a home.  It’s that the asset is disappearing. 

Could the home equity asset be put to better use?  We promote home-centered care and at same time we have a system that forces people to put their homes into trusts where they can’t use them.  We need a different way of thinking about this asset.

Right now very few options to liquidate home equity.  HUD has developed new “HECM Saver” with far lower upfront costs.  There are already products that can help us think more creatively about how these products can be used.  Paying interest on loan eats up a lot of the equity in the home.  Would a state be willing to put up some of the money to help prevent people from ending up on Medicaid?

If we want this asset to be used, we have to be proactive and engage with people to ensure that what is developed makes sense.  Great ideas, no money.

Question:  What about low interest rates?  Barb:  Two impacts:  amount of money bank will loan you and what happens after several years at higher levels of interest.  Right now is not a bad time to lock in a fixed rate. 

Question:  Stricter standards on loans?  Barb:  Amount of money available is constrained.  What I’m hearing, unless you’re employed, you’re not going to get a re-fi and hard even if you are employed. 

In this economy the problem is not just frail or infirm elderly; it’s the 68-year-old who has to keep working but has lost his job.

As we talk about how to deal with these issues, we have to focus on more than cost.  Not just the life of the loan, but the life of the borrower.

Duration, how much money do you need?  The longer you stay in the home, the more interest rates matter.  Reverse mortgages are designed for the line of credit draw.  If you have other resources, home equity is part of picture, but if heavily dependent on home equity then you start falling off the cliff.  If draw down slowly, can last a long time.  But if taking it out as a lump sum or $2,000 per month, going to burn through equity fast and likely to fall off the cliff.

All focus these days is on growing savings; little on how to use savings. 

People taking out RMs are on the leading edge.  They need help and good guidance.  What are opportunities? 

What do we know about people who need LTC and are homeowners?  Don’t know much.

Facing new retirement reality.  Not just about home equity or long-term care.  Folks now are facing the squeeze.

Does RM make you ineligible for Medicaid?  Specifically require counselors to ask if people are receiving any public benefits.  Lenders don’t get it.  Lump sum can render you ineligible for public programs.  Let’s focus on problems to solve, not just on the product.  Not just having money, it’s how to use it best.

If want to stay out of NH, may have to remodel home.

# End of notes #

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For the Center for Long-Term Care Reform’s position on reverse mortgages and home equity conversion, search “reverse mortgage” and “home equity” here to find eight LTC Bullets on the topic.

Also see “Briefing Paper #6:  Private Long-Term Care Financing Alternatives,” www.centerltc.com/BriefingPapers/6.htm -- (PDF for print), which explains how to unleash the power of private LTC financing sources, including home equity conversion.