Pulitzer Prize-winning journalist Saul Friedman (bio) writes the weekly Gray Matters column which appears here each Saturday. Links to past Gray Matters columns can be found here. Saul's Reflections column, in which he comments on news, politics and social issues from his perspective as one of the younger members of the greatest generation, also appears at Time Goes By twice each month.
It’s foolish at a certain age to make New Year’s resolutions. We’ve been there and done that, which is how we got to be our age.
Besides, you don’t need a resolution to be good to yourself in this new year, this new decade. It’s bound to be better than the last one. But I suspect this recession hangover will be with us for some time and there are some steps to consider to get through another down year. I’ll get to that in a moment.
Too many older Americans, according to the latest studies of the economy, are just getting by. Or worse. I don’t need to tell you the dismal facts. The stock market is staging a halting comeback, but retirement savings plans are still down. Those 401(k)s have not grown enough to be counted on for retirement. Even traditional pension funds are hurting.
Poverty rates remain the same for older Americans at 9.7 percent, but that doesn’t tell the real story. By other legitimate measures, perhaps 20 percent of people over 65 are hovering near the brink. Older women, especially widows, are among the hardest hit.
But because they are above the official poverty lines ($10,830 for an individual; $14,570 per couple), many low income people and families don’t qualify for many state and federal programs. The Associated Press reported around Thanksgiving that the number of older people living alone and seeking help from food pantries had nearly doubled to over 400,000 in 2008, before the recession. And bankruptcies have increased among older people , many because of medical bills they couldn’t pay before they were eligible for Medicare.
Finally, as I’ve reported, there is no cost-of-living increase in your Social Security benefit this year because there’s been no inflation. But the Consumer Price Index, on which this decision was based, doesn’t tell the real story for most older people.
Typical among the cries of foul was an e-mail from Mike Griske, 62, of Hicksville, New York, who was in the life insurance business for most of his working life until he became disabled with spinal problems eight years ago.
With an insurance man’s eye, Griske took apart the items that go into the official CPI-W (which stands for workers), down to a box of tissues, to demonstrate the reality: prices are going up faster than the index, especially for older people. And he’s written to everyone he can think of to appeal for change.
Unfortunately, nothing will change soon, if at all. The proposed $250 payoff for Social Security recipients, which was left out of recent legislation, won’t help much anyway. And like other retirees, Griske has been informed that his pension, which is tied to the CPI-W, will be going down by 1.8 percent.
His story is not unusual but if he owned a home with substantial equity, there is a way he could get some relief. And I’ve been pushing it each year about this time - the Home Equity Conversion Mortgage (HECM), the best and most popular Reverse Mortgage, because it’s guaranteed by the still-solid Federal Housing Administration (FHA).
The guaranty means the borrower is protected from losing his/her property and the lender is protected from losing his/her money if the value of the property declines below the worth of the loan.
While that’s been a large problem in the conventional (forward) mortgage market, it has not happened to HECMs despite the unfounded warnings of lawmakers with family ties to the private mortgage market. Indeed, FHA remains so financially solid that this Congress decided no taxpayer funds were needed to offset possible losses.
To make sure it stays that way, the FHA implemented a 10 percent reduction in the proceeds that homeowner-borrowers can get from an HECM. Someone who qualified for a $100,000 loan before the change, will now get $90,000. That means the program is expected to operate in the black, as usual, with few, if any defaults.
I am an HECM borrower and like most participants, the cash I got from the reverse mortgage served as a cushion which was carefully invested. The proceeds may also be taken as a line of credit or as period payments. This is one federal government program that has worked as intended for millions of borrowers yet relatively few Americans have taken advantage of it partly because they don’t like to mortgage a home that’s free and clear, or they’re concerned about their heirs. So they let all that equity remain idle.
Private (non-guaranteed) reverse mortgages have been around for years. But only after years of study by housing and aging experts did the FHA get into the business when President Reagan signed it into law on February 5, 1988. (Note to his present day admirers: He helped save Social Security while expanding the federal government into the reverse mortgage business.)
Now, although many younger homeowners can’t refinance because greedy banks are refusing to part with their money, reverse mortgages are available because of the FHA guarantees. And as Kiplinger has reported, older homeowners facing foreclosure have been rescued by HECMs which can supply the cash needed to catch up on payments.
I assume you know the basics: To qualify for a HECM, you must be 62 or older, own the property outright or have accumulated sufficient equity and occupy the property as your principal residence. There are no income or credit qualifications. Unlike a second mortgage or home equity loan, there are no monthly payments for a HECM. And no repayment is necessary as long as you live in the home.
All closing costs, insurance and interest may be financed in the mortgage. None of the proceeds is taxable. But all closing costs and interest, which mount up, are tax deductible when the loan is paid. The loan comes due when the property is vacated, at which time the borrower or, more likely, his/her heirs may pay off the loan and take possession of the house. In general the value of the home will exceed the payoff amount.
While many conventional mortgages are in trouble because they are said to be “under water” because the amount owed exceeds the value of the property, under the law, the homeowner with a HECM is NOT liable if that happens because the lender is guaranteed against loss. One requirement, however, is that the property must be maintained and the property taxes are paid.
Another requirement, which has helped the program stay mostly honest, is the provision that all applicants must undergo personal and usually face-to-face counseling by an expert designated and licensed by the Department of Housing and Urban Development (HUD). The permitted fee is $125 and it’s worth it because the counselor can and should tell you the downsides of reverse mortgages: the interest that must be paid at the end of the loan will be great; if the beneficiary is in a nursing home for a year, the loan comes due.
Susan R. Lagville, of Housing Help Inc. in Greenlawn, New York, is a HUD counselor and helped bring me up to date on the latest HECM news. First, HUD has raised the maximum loan value of the homes to $625,000 throughout the country as a result of rising home prices. For the same reason, the required insurance (2 percent) will cost more. The one-time fee to the lender has been reduced from two percent of the home value to a flat $6,000.
More important, as I mentioned, HUD usually loaned about 60 percent of a home’s value (although there are other factors such as the neighborhood, the condition of the home and age of the borrower). Now, said Lagville, HUD is reducing the average loan by ten percent.
While single-family homes, condominiums and certain manufactured homes qualify for HECMs, sources tell me that HUD may soon include co-ops, which would be important for many city-dwellers. Beginning last year HUD permitted borrowers to use the proceeds to buy another home, perhaps for retirement, after selling the first home.
Finally, while the HECMs themselves have been mostly free of problems, there are some greedy types who want a piece of the HECM’s cash proceeds. Some lenders or their agents have talked borrowers into putting the proceeds into questionable annuities and other investments.
Langville recommends against taking all of the funds in cash, on which you pay interest. Better alternatives include taking the HECM in lines of credit or periodic payments. I repeat, these proceeds are tax free.
Some good websites to learn more: FHA Reverse Mortgages; the U.S. Department of Housing and Urban Development; and the industry's website, National Reverse Mortgage Lenders Association, where you may calculate the possible proceeds you can get from a HECM.
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