"Bleeding Equity from Every Pore, oh, Please have a Heart"

**                                                              **
                    W. Curtiss Priest, Ph.D.
          Center for Information, Technology & Society
              466 Pleasant Street Melrose, MA  02176
  E-mail: BMSLIB@MIT.EDU, Voice: 781-662-4044, FAX: 781-662-6882


                          August 4, 2003

                        Public Issue #:109

                          CITS DEBT WATCH

    "Bleeding Equity from Every Pore, oh, Please have a Heart"

          Commentary by Dr. W. Curtiss Priest, Director:

As readers know we consider the excess "cash" that results
from either home equity loans or from home refinancings to
lead to excess purchases out of debt-financed buying.  We are
confident that such excess purchases distort the overall
accounting for GDP.

One only need visit prior issues of our newsletter to see our
attention to this issue on several occasions:

http://groups.google.com/groups?hl=en&lr=&ie=ISO-8859-1&scoring=d&q=%22cits+debt+watch%22+%22debt-financed%22
[please rejoin this address if it splits]

But now we observe a more ominous trend, on top of the
refinancings that already occur.

There was a time when, we as children, could at least count
on the equity in one's elder parents' home, as a means
to finance "elder care."  What was, on average, 2 years
in a "nursing home" has become 4-5 years, on average.

However, what do you do when your mother or father decides
to "supplement their income" using the equity from the
family home?

With (abnormally) high real estate prices, banks are greedy
to lend to seniors who have a solid piece of collateral --
their homes.

Heck!  A loan is a loan, and if banks can loan folk money
based on their house collateral, they will do this in whichever
and whatever form it might take.

Are such loans in the "public interest?"  Heck!  Banks don't
care, they just want the collateral if the loan "turns sour."

So, we read from David Abel (below) that "reverse mortgages
lure many seniors."

To this I wish to say, ohmygosh, banks will bleed every last
amount of equity out of seniors, regardless of the economic
consequences to everyone else.

You might say, oh, with such high prices for real estate,
shouldn't seniors live in the luxury that such high prices
enure?

This newsletter writer errs on the side of caution.  Whenever
asset prices exceed the rate of inflation by a percent or
two, we should be leery.

But, whenever asset prices increase much past that, we must
be downright, extremely careful and extremely cautious.

Booms occur in all kinds of markets.  We have ridden a
"high tech" boom up, mightily, down drastically, and somewhat
back up.

But, heck, your home?  This is the only stability you have
when everything else turns to "pucky."

Now, if you bleed your home for excess equity which may not
really be there (i.e. prices might decline), what kind of
mess are you creating?

W. Curtiss Priest,
Editor, CITS Debt Watch


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Reverse mortgages lure many seniors
By David Abel, Globe Staff, 8/4/2003

BANGOR -- Unwilling to move, but pressed by rising bills and weak
retirement portfolios, senior citizens in downeast Maine are leading a
national love affair with costly loans called reverse mortgages.

After working for decades to pay off their home mortgages, a record
number of seniors today are turning to such loans that allow them to
spend down their home's value and put off payments until they move or
die.

For some, the loans -- available to homeowners 62 or older -- improve
quality of life, help avoid nursing homes, or keep bill collectors at
bay. But with monthly fees and closing costs running thousands more
than conventional mortgages, the federal government requires people to
talk to specially approved counselors before taking one out.

"I was strapped, and I didn't want to depend on my children," said
Dorothy, a Bar Harbor resident who recently took out a loan of $55,000
on the two-story, $250,000 home where she has lived for two decades.
Dorothy, like others interviewed, is uncomfortable about resorting to
a loan so late in life and asked that her last name not be used. "This
is a way for me to maintain my independence." Interest rates for
reverse mortgages -- so called because the bank pays the borrower for
many years instead of the other way around -- are now at a
half-century low of 2.6 percent, but they're adjustable monthly, so
that number is likely climb. And taking out a reverse mortgage means
people like Dorothy, 80, will have less money to leave their children
when they die.

Nationally, between September and the end of June, more than 12,000
older homeowners received reverse mortgages -- an increase of more
than 2,600 from the same period a year earlier, according to the
National Reverse Mortgage Lenders Association.

The number of homeowners obtaining such loans jumped in cities around
the country, but no more than in the Bangor region, where the
percentage of older borrowers rose by 145 percent, according to the
association. "If a senior needs cash, this is often their best
option," said Peter Bell, president of the reverse mortgage
association. "More people are recognizing that."

Stephen J. Eastman who sells reverse mortgages in Maine, coastal New
Hampshire, and Essex County, Mass., said the seniors he works with say
their fixed incomes, rising bills, and slow-growing investments are
limiting their lifestyles.

"Their taxes have continued to go up with the value of their home, or
their investments -- whether they be in the stock market or in CDs --
they're just not staying up with the amount of money it costs them to
live," he said. He's had clients use reverse mortgages to pay for home
health care nurses, prescription drugs, second homes, that special
vacation, or just for "enjoying life a little more."

"Some people think reverse mortgages are just for the needy," he said.
"For me, my typical customer is in their 70s and usually in pretty
good health. . . . They have a very nice home and they just want to
have a better quality of life."

Congress sanctioned reverse mortgages in the early 1980s, but the
loans didn't really catch on until the past decade.

Some advocates for the elderly worry that brokers eager to earn the
lucrative closing costs, which the association says average $8,000 to
$10,000, and service fees that can run $35 a month, are pushing
seniors into deals not in their best interests.

"With so many people's retirement plans in the dumps, this can be an
appealing option, but there are a lot of risks in not understanding
their options," said Bronwyn Belling, a reverse mortgage specialist at
the AARP Foundation, which assists people 50 and older.

A reverse mortgage doesn't make sense for someone planning to move in
a few years because of the expense of the closing costs. And many
people don't realize that they can get tax relief from their state or
communities to help pay tax bills or federal grants for prescription
drugs.

The nonprofit group Homeowner Options for Massachusetts Elders,
counsels its clients against all loans, arguing that seniors with
lighter debt loads will fare better in the long run. Len Raymond, the
group's founder and director, said he's against the idea of taking out
reverse mortgages for lifestyle improvements, which he says will leave
people with little or no home equity when they really need it.

He's had a few clients, he said, who lost their homes because they
took out reverse mortgages to invest in technology stocks during the
dot-com boom.

But Raymond, who also helps seniors take out loans, said the nonloan
options for senior citizens have dried up in recent years, with
government cutbacks and the shrinking economy possibly contributing to
the rise in reverse mortgages.

"In the old days, for eight out of every 10 clients, we could find
nonloan options," he said. Now, he can do that for only five or six
out of 10.

At Bangor's Hammond Street Senior Center, a new meeting place for the
growing number of elderly residents -- who now account for 16 percent
of the metropolitan area's population, few believe that taking out a
reverse mortgage is wise, no matter how desperate their finances.

"To me, it's like cashing in all your chips," said Bob Paschal, 73, a
widower and retired painter, who describes himself as financially
strapped and "very disappointed" with the performance of his
retirement account.

Echoing scores of seniors playing cards or chatting with friends at
the newly refurbished building downtown, Hiram M. Perry, an
86-year-old former businessman, said: "I wouldn't touch it with a
10-foot pole."

But for nearly every doubter, there's an elderly homeowner curious
about the options -- and in serious need of cash.

They are couples like Calvin and Barbara Shattuck, of Lyman, who have
lost thousands of dollars in mutual funds and have only the value of
their house left to sustain them.

They asked Eastman, a broker for Financial Freedom Senior Funding, the
nation's largest reverse mortgage company, to come over late last week
to talk with them about reverse mortgages. Like many of Eastman's
clients, the Shattucks, who've lived in their 30-acre home for years,
don't want to move out just because money is tight.

Barbara Shattuck, 65, said her husband's pension from working as a
mailman no longer suffices. Eastman's pitch was convincing.

"We think this will help," she said, after he left. "We hope it will."

David Abel can be reached at dabel@globe.com.

This story ran on page A1 of the Boston Globe on 8/4/2003. c Copyright
2003 Globe Newspaper Company.

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For some, relief now may cost plenty later

By David Abel, Globe Correspondent, 8/4/2003

Reverse mortgages, as the name suggests, call for the bank to send the
check, rather than the borrower -- at least in the short term. The
loan, available to homeowners 62 and older, must be repaid with
interest when the borrower moves out or dies.

The money can be a godsend for people who could not otherwise afford
home healthcare or mounting bills, but it can also encourage senior
citizens to spend money before they really need it. And, of course,
any value taken out of the house means less money to pass on to
children and other family members.

Like a second mortgage, the money can be spent on anything, including
medical and credit card bills, home repairs, and living expenses. The
homeowner continues to own the house and hold the title to it during
the life of the loan.

The borrower can choose whether to receive the money in a lump sum, as
a line of credit that can be drawn down over time, as fixed monthly
payments, or a combination of all three.

One reverse mortgage broker said that on a typical $100,000 reverse
mortgage, the borrower might opt to take a $20,000 lump sum at the
beginning for a big expense such as home repairs or buying a new car,
then a monthly stipend of $300, with the remainder on a line of
credit.

The interest rate, which is now at a 49-year low of 2.6 percent, is
usually variable monthly over the length of the loan, meaning it can
rise or fall every month, indexed to the federal treasury constant
maturity rate.

The size of the mortgage depends primarily on the age of the borrower,
the condition and value of the home, and current interest rates.
Homeowners are often required to take out a costly insurance plan to
make up the difference in case the home is worth less than the loan
when it is finally sold. Most reverse mortgages are also guaranteed by
the federal government.

Closing costs for a reverse mortgage are several thousand dollars
higher than for a conventional mortgage, in part to cover the
insurance fees.

The money is tax-free and does not affect regular Social Security and
Medicare benefits, according to the National Reverse Mortgage Lenders
Association, though it may disqualify borrowers from Medicaid or state
assistance programs. Federal law requires borrowers to consult a
government-approved counselor before taking out a reverse mortgage.

David Abel, Globe Correspondent

This story ran on page B4 of the Boston Globe on 8/4/2003. c Copyright
2003 Globe Newspaper Company

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