The July 2008 edition of the newsletter featured a discussion of community programs for aging- in-place.  Aging-in-place refers to programs designed to help older seniors stay in their home.  It typically involves things like assistance with transportation, home maintenance and some of the heavier house chores that become problematic as physical capacities decline.

But often the problem faced by aging seniors involves not only declining physical capacities, but decreasing liquidity.  Many have lived in their current home at least 20 years if not for most of their adult life.  It was a habit of the ‘war generation’ and the ‘silent generation’ to pay off their mortgage, so they have arrived at their late senior years with lots of wealth, but limited cash.  The reverse mortgage can supplement social security and pensions.   Moreover, even in the falling housing market of 2008 and 2009, reverse mortgages are proving to be a very safe form of borrowing.

The majority of the reverse mortgages are HECM, or Home Equity Conversion Mortgages written under legislation passed in 1987 that allowed HUD, the Housing and Urban Development Agency to underwrite reverse mortgages.  Intuitively not to difficult to imagine, the actually process of operating a reverse mortgage is filled with some technical problems.  In 1990, there were only 157 HECM loans in the HUD program.  However, in 2008 there were 112,154 or about 700% increase in reverse mortgages.

How do they work and why are they ‘safe?’  First, from the borrower side they work something like a credit card line-of-credit, except in some senses one is borrowing their own wealth.  Second, the homeowner retains title to their home as long as they live.  One can continue to live in the home even after all of the equity is drawn.  The lender has a lien which heirs must settle usually by selling the home, but the owner retains title so long as they continue to live in the home.  Of course to reduce the uncertainty about the total life of the loan, reverse mortgages limit who may receive such a loan to those who are at least 62 years of age.  The calculations about expected exhaustion of the stock of wealth are based on life expectancy at the date of the loan is signed.  The estimation of the ‘tenure’ payment, the monthly amount of sustainable draw, is calculated from the date of origination date over expect life.  One advantage of the reverse mortgage compared to a standard equity line of credit is that the home’s value is assumed to trend according to the long-term rate of growth in the value of housing, about 4% per year.

There are a number of safety features built into reverse mortgages.  First, one should anticipate that only about 80% of total equity will be made available to the borrower.  This is a safety hedge against the potential that life expectance in under-estimated.  Second, a part of the cost of the loan is a fee which is placed in an insurance pool.  Again, the insurance pool is a hedge against the potential that life expectance is under-estimated, since the homeowner may remain in the home and continue the ‘tenure’ payment for the lifetime.

There are some restrictions and costs of which once should be aware.  First, over a remaining life span of 20 years the cost of the reverse mortgage is only slightly higher than a typical forward mortgage.  However, there are high fixed costs to the loan and therefore using a reverse mortgage for short-term financing is very expensive.  Second, the reverse mortgage requires that the borrower live in the home for six months and a day of each year.  This means that this is not financing to access in the event of a prolonged illness that requires nursing home care. Third, there are very difficult complications in reverse loan where household members are of significantly different ages.

A reverse mortgage can provide the cash an older senior may need to cover an unexpected contingency or additional cash to supplement other income sources.  It can play a very key role in an aging-in-place life plan.  If, as a community planner, you are looking for ways to keep aging seniors as a vibrant part of your community, work with a certified reverse mortgage councilor to disseminate information about the reverse mortgage option.  The AARP publishes a very helpful book, “Home Made Money,” or go to www.reverse.org.