A real estate concept that could provide thousands of dollars apiece for American homeowners when they need it most--in their old age--has been strongly endorsed by an influential White House housing policy-advisory group.
The concept is known as "equity conversion." It involves tapping the accumulated capital in one's home to produce current monthly income, without having to leave or sell the property. Although still in the experimental stage, public- and private-sector advocates predict that equity conversion will become one of the most important financial innovations of the 1980s.
The seal of approval by the President's Commission on Housing, provided in its final report this month, will almost certainly hasten growth of the technique.
The commission called upon three federal agencies to take immediate steps to clear away regulatory or legal barriers to home-equity conversion. It asked the Federal Home Loan Bank Board to streamline its rules for lenders who want to make line-of-credit or lump-sum payments to elderly homeowners, secured by equity in real estate.
It asked the Internal Revenue Service to either clear up its own tax rules affecting a key form of equity conversion -- called sale-leasebacks -- or to submit legislation so Congress can clear it up.
The commission also directed the Department of Housing and Urban Development to come up with guidance for lenders, consumers and local governments who want to use the equity-conversion concept.
The presidential commission's decision to promote equity conversion "is tremendously good news, tremendously exciting," in the words of one leader in the field, James J. Burke of Morristown, N.J.
Burke is president of American Homestead Inc., which plans to begin offering an equity-conversion program commercially through banks and savings and loan associations this summer. His program -- backed by what Burke says will eventually be $100 million in long-term Wall Street commitments -- is scheduled to kick off in New Jersey in July, following passage of state-enabling legislation.
American Homestead expects to move rapidly later this year into New York, Pennsylvania, and Connecticut after New Jersey. Within "a year or two," according to Burke, the program should be operating nationwide.
Burke's program provides homeowners 65 years and older the opportunity to convert a portion of their "frozen" equity into monthly cash. Participants receive income supplements of anywhere from $100 to $500 or more per month with no limit on the number of payments during the owner's lifetime.
When the owner decides to sell -- or upon the owner's death -- American Homestead's investors are entitled to collect the full total of their monthly payments to the owner out of the sale proceeds of the property, plus interest at a below-market rate agreed to in advance. They also receive a negotiated percentage of the appreciation in the house--if any--that occurred since the date of the original equity-conversion contract.
American Homestead is one of a growing number of financial organizations preparing to plunge into the equity-conversion field. Other fledgling companies are getting ready for business--or are already active on a small scale--in Washington, D.C., Florida, Oregon, Wisconsin and southern California.
They all expect to interest pension funds, life-insurance companies, conventional lenders--and even giant housing investors like the Federal National Mortgage Association--in the potentials of the so-called elderly boom of the 1980s and 1990s.
Not only are the elderly one of the fastest-growing population segments, proponents argue, but older Americans tend to have a special financial problem: They're often "house rich" and cash poor. Their incomes tend to be static or declining, but their equity ownerships in real estate tend to be extraordinarily high.
University of Rochester researcher Bruce Jacobs, for example, estimates that Americans over 65 hold more than one-half trillion dollars in net equity in their homes in 1982. Four out of five of the 12.5 million elderly homeowners in this country have paid off their homes entirely, and have an average equity stake worth $50,000.
By pulling out $300 to $400 a month from their accumulated equity, hundreds of thousands of owners could afford to live at a higher standard in their present home, travel, or simply pay their bills. They'd be borrowing money, in effect, but the dollars would be coming out of a "piggy bank" they'd built up themselves (with the help of inflation) over many years.
Commercial firms aren't the only aggressive advocates of equity conversion, by the way. Nonprofit and foundation-supported groups across the country see equity conversion as particularly important for low- and moderate-income elderly homeowners. Projects in several cities, such as Buffalo, for example, now use equity conversion to finance repairs and energy improvements on people's homes. The nonprofit San Francisco Fund's pioneering $3 million "reverse mortgage" project has been so successful in helping homeowners in the Marin County area that leaders are expanding it this spring to other parts of California.
With the federal green light flashed by the White House, American homeowners are going to start hearing a lot more about equity conversion--whether from financial entrepreneurs or local social-welfare groups.