Forward on reverse - Building up reverse mortgage reservesAtare E. Agbamu, CRMSreverse mortgages, senior citizens, financing
In my April 2004 column, "Greenspan's concerns: The reverse
mortgage solution," I proposed that Congress should permit
debt-laden homeowners to use part of their low-yielding social
security dollars to pay down their high-cost mortgage debts. As
they reduce their mortgage debts, they build up reverse mortgage
reserves that they can tap into in retirement to supplement
potentially lower social security benefits. How will this radical
idea work? So, what are the implications of this idea? Why do we
need reverse mortgage reserves?
The how is simple. At 55, Bruce and Brenda Cashstrap have done
very well. They have put their three winsome children through
college, borrowing heavily against their 2,500-sq. ft. suburban
home in the Twin Cities. They have no savings, and the value of
their 401(k)s cannot support them for more than five years into
retirement. Combined, they pull in approximately $100,000 annually.
The market value of their house is $250,000, and they owe $200,000
on it at six percent. At their current monthly payment of $1,199,
they would be 85 years old by the time their mortgage is
Meanwhile, between them, approximately $500 is taken from their
paychecks and deposited into a low-yielding Social Security Trust
Fund every month. If Congress allows them to use half of that$250to
pay down their principal, they will knock off 10 years and five
months from their mortgage, saving $91,297 in interest costs. Plus,
they will have a house worth more than $500,000 free and clear,
assuming a four percent appreciation rate.
Now debt-free at 75, with more than half million dollars in home
equity or reverse mortgage reserves, they can use a reverse
mortgage to unlock these reserves and live it up. Heres how it
First, it will accelerate equity build-up for homeowners, a good
thing for low savings, debt-soaked, nearing-retirement homeowners.
Second, the idea will ensure that homeowners retire in the black,
secured under their roof. Third, and most importantly, it will help
Uncle Sam reduce the national deficits. With most retirees able to
supplement fixed retirement incomes with their reverse mortgage
reserves, our national leaders will have the political elbowroom to
align retirement benefits with demographic and fiscal facts.
Finally, it will grow the reverse mortgage industry by making more
equity available for reverse origination and servicing.
So, why do we need to encourage the acceleration of reverse
mortgage reserves? In a recent report authored by Tamara Draut and
Heather McGhee titled "Retiring in the Red: The Growth of Debt
Among Older American," Demos, a New York City-based Think Tank (www.demos-usa.org), showed a
shocking increase of credit card and other debts among America's
senior citizens (defined as over 65) and a group they called
"transitioners" (those between ages 55 and 64).
According to the report, credit card debt among seniors
increased by 89 percent between 1992 and 2001 to an average of
$4,041; recently-retired seniors (between 65 and 69), saw the most
dramatic rise in debt 217 percent to $5,844. Finally, among the
55-64 age group, credit card debt grew by 47 percent, to settle at
an average just shy of $4,100. The increase for female-headed
households was at 48 percent.
In addition to the chilling Demos report, Federal Reserve Board
Chairman Alan Greenspan, in his Feb. 25 report to Congress, saw a
sea of federal red ink for the foreseeable future that even strong
economic growth may not reverse. So, Congress can begin the task of
addressing our national deficits by allowing homeowners to
reallocate some of their low-yielding social security assets to
build up reverse mortgage reserves by paying-down high-cost forward
Let's think forward on reverse!
Atare E. Agbamu, CRMS, is a senior mortgage consultant and
director of training at Inver Grove Heights, Minn.-based Credo
Mortgage. Atare's reverse mortgage interview has been webcast on Mortgage Mag Live!, and he
currently serves on the boards of Little Brothers Friends of the
Elderly in the Twin Cities and nationally. He can be reached by
phone at (651) 389-1105 or e-mail [email protected]