The pot o' gold at the end of the rainbow

Filed under: News |

U.S. Census bureau analysts predict as many as 20 percent of American seniors are destined for an impoverished retirement, based on limited savings and pensions.

In El Paso County, Dr. Fred Crowley, senior economist for the Southern Colorado Economic Forum estimates that the number will grow to 12,767 or 13 percent of those living under the poverty level by 2025.

To add to a retiree’s financial headaches, government economists estimate that the Social Security Administration will begin cutting benefits by more than 25 percent by 2023, or sooner, unless Congress acts to increase funding. Many who thought their future was secure were negatively affected by a down stock market from 2000 to 2002 corporate accounting scandals at companies such as Enron, Tyco and Worldcom.

But is the future really that bleak? Thanks to Yankee financial ingenuity and two FHA/HUD and Fannie Mae reverse mortgage programs created in 1989, fortunately the answer is “no.”

In the former case, loans are guaranteed up to the FHA current loan minimum of $194,600, based on the client’s age and home value. All applicants in the household must be 62 years of age or older – and the borrower is entitled to a growing line of credit and flexible payment options.

In the HomeKeeper plan offered by Fannie Mae, similar lending limits apply, but closing costs are generally lower and the applicant is offered a fixed line of credit.

Local lenders enter market

Lending experts, Marshall Young of Denver-based Paon Mortgage and Jamey Nordby of El Paso Mortgage in Colorado Springs, both see a light at the end of the retirement tunnel. Based on home equities built over years of ownership, reverse mortgages, they say, provide the answer to mounting long-term care costs faced by many retirees and their families.

Young refers to an April 19 Wall Street Journal Online report that points out nearly 13.2 million households could qualify for an average of $72,128 in reverse mortgage loans, or a total of $953 billion, according to the National Council on the Aging. The senior advocacy group analyzed 2000 homeownership data collected as part of a federal study.

That $72,000 equates to a home-health aide for four hours a day for nearly three years; or adult day-care services every weekday for an Alzheimer’s client for 6.5 years; or $500 in family caregiver’s expenses – including one respite day per month, the article says.

Conceived as a way to augment the incomes of those struggling to live on Social Security benefits, a reverse mortgage generates monthly income for the 5.2 million households already receiving Medicaid benefits or the additional millions of elderly at risk of needing Medicaid if forced to pay for long-term care, said Dr. Barbara Stucki, a consultant heading the aging council’s study.

Paon Mortgage’s Colorado Springs representatives, Young and Fred Fierick, conducted a special presentation for Colorado Springs Better Business Bureau representatives in April, laying out the terms and requirements of federally-sanctioned FHA and Fannie Mae reverse mortgages. They hope to promote the program to area seniors in the coming months.

Big business

As a long time Colorado Springs real estate broker, Young sees the coming reverse mortgage boom as potentially bigger than home equity-based refinancing. “Seventy-seven million of us will enter the senior category starting in 2008,” he said.

“There’s more than $900 billion in mortgages held by people over the age of 62. Respected companies like Lehmann Brothers on Wall Street are buying most of the paper – and the loans are 100-percent guaranteed. They’ve got complete faith in the program because there’s so little risk involved. It’s a government backed and insured program – even if we enter a devalued market. And the program is fixed so once the borrower qualifies, he or she will never receive a penny less than their contract states,” he said.

“Average Social Security benefits run somewhere around $500 to $800 per month. If a parent develops physical problems, they often have to depend on their children or on government Medicaid assistance which requires paying down assets. Reverse mortgages shut monthly payments off completely, depending on how much home equity is available. The only folks who may not qualify are those who have robbed their equity through aggressive refinancing.”

According to Nordby, whose firm is a member of the National Reverse Mortgage Lending Association, those most interested in the program tend to be estate planning clients, seniors who want to enhance their lifestyle during retirement and those who need to do something to keep their home.

“We especially see tough cases for elderly couples where all their resources are used for medical treatment, and then one spouse dies. The remaining spouse now faces the future with no money, the possibility of foreclosure and probably a lower Social Security benefit,” Nordby said. “By using a reverse mortgage, we take away the burden of house payments and actually provide income – and the deed remains in the borrower’s name.”

A welcome safety net

He points to the recent case where a 70-year old man with terminal cancer had to give up his 30-hour per week job. The man’s Social Security benefits weren’t adequate to cover food, rent, medical costs and utilities. “By the time we were through, he could quit working, had no house payments and received extra income so he could now afford the services he needed,” Nordby said.

El Paso Mortgage has offered the program for three years. “In our first year we just did a handful of reverse mortgage loans. Last year we did a handful of reverse mortgage loans per month,” he said.

And that trend is becoming a national phenomenon. One of Florida’s largest reverse mortgage companies, American Reverse Mortgage Corp. in Ocala is just three years old.

In a story published in the December 13, 2003 Ocala Star Banner, W.L Plusipher, the company’s president said that, “it used to be if you wanted to save the world you’d do something like become a medical doctor. I’ve done a lot of things and literally never found anything that saves peoples lives like this. We’ve saved people’s lives by keeping their home from being sold, or allowing them not to have to go live with their children or worse. Reverse mortgages save lives.”

Young and Nordby agree. “By 2010 the 60-plus population will be the fastest growing segment in our country,” Nordby said. “The U.S. government can’t afford to support all of our living and medical expenses. This really is a viable option for self-sufficiency.”

“This is good for parents and for adult children faced with the dilemma of how to allow Dad or Mom to stay in their home,” Young said. “It’s is a great safety net for all of us.”

- Editorial@csbj.com