Your home may one day turn into your pension fund, paying you a steady $300 to $1,500 a month while you continue occupying the house indefinitely.
That, at least, is what a little-publicized but rapidly growing group of financial pioneers across the United States would like to see.
They are private entrepreneurs, foundations and state and local government officials who are part of the "equity-conversion" movement. Their unofficial leader is Ken Scholen, a Wisconsin state government employe who believes that the financial problems of the elderly will be one of the major challenges of the next two decades.
With the help of a $250,000 federal grant and a small army of consultants and researchers, Scholen is designing financing vehicles that enable older Americans on fixed or declining incomes to support themselves by freeing the equity that is "frozen" in their homes.
Studies by Scholen and others have found that while three-quarters of elderly households in American communities own their own homes -- often with little or no mortgage debt -- most of the same people have annual incomes well below the median for their areas.
Their homes typically have gone up in market value several-fold, giving them tens of thousands of dollars of wealth on paper. Yet their fixed incomes or retirement pensions aren't enough to keep them comfortably ahead of food, tax and utility bills that keep mounting in an age of double-digit inflation. They don't want to sell their homes -- the most direct way to convert their equtiy into cash -- so they're left in a terrible squeeze. "They are the classic example of 'house rich, cash poor,'" Scholen said, "and you find them in every city and every town. They're your neighbors down the street or your mother or father."
Or they are you -- right now or a few years from now.
The national "equity-conversion" movement, which is loosely coordinated from Scholen's Madison, Wis., office, is coming up with some interesting potential solutions to this dilemma. Working with lending institutions, foundations and local governments in San Francisco; Milwaukee, Madison and Monona, Wisc., and Buffalo, N.Y., equity conversion groups are arranging for "reverse mortgages," "sale and leaseback" techniques, as well as property tax deferrals secured by government liens on homes.
In Buffalo, a member of the city council has created a $1 million, nonprofit equity-conversion "bank" that will shortly begin acquiring houses, fixing them up for their elderly owners, guaranteeing lifetime residence and paying out monthly cash annuities.
The "reverse-mortgage" techniques allow banks or savings and loan associations to pay out set dollar amounts per month to homeowners, up to a fixed percentage of the estimated value of the property, for as long as 10 to 15 years. The net payments exclude an interest-rate charge -- agreed upon in advance -- and can be graduated to rise with inflation over the years. Should the homeowner or owners sell the property or die, the leader receives back all funds advanced out of the proceeds of the property sale.
The sale and leaseback concept is being tried by an innovative Carmel, Calif., mortgage banking company, Fouratt Corp., which is working closely with Scholen's project.
Using Fouratt's technique, elderly homeowners deed over title to their property to small-scale private investors, such as a couple seeking to acquire real estate for long-term capital appreciation.
The purchasers pay a percentage of the total price up front, and guarantee contractually to lease the home to its former owner for the duration of that person's life or for as long as he or she desires to continue living in it. The former owners pay back part of their monthly installments to the new purchasers in the form of a set-lease fee. After paying the "rent," the elderly occupants still have hundreds of dollars for other expenses.
Scholen is working out loan arrangements that could bring equity-conversion financing to banks and S&Ls across the country.
At present, only three S&Ls offer reverse mortgages to the elderly (in Cleveland; Portland, Maine; and Perkasie, Pa.). Stolen believes, however, that "once the proper vehicle exists that protects the elderly homeowner, the lender and secondary mortgage market investors" such as the Federal National Mortgage Association, "you're going to see this whole concept take off very fast."
(For more information on equity conversion concepts or programs, contact Ken Scholen at the Wisconsin Home Equity Conversion Project, 110 East Main St., Room 1020, Madison, Wis. 53703.)