Thousands of older American homeowners are likely to be the direct beneficiaries of two major breakthroughs in the burgeoning field of home-equity conversion.
Breakthrough No. 1 is in the hands of the federal government. Breakthrough No. 2 is being readied at the headquarters of the 28 million-member American Association of Retired Persons (AARP).
Taken together, the two developments are certain to make 1988 a landmark year for homeowners struggling with an increasingly widespread problem: how to convert some of their stored-up real-estate equity into spendable cash without selling their house, without moving and without making monthly payments on a loan in any form.
"House rich, cash poor" describes large numbers of the elderly in the late 1980s, according to demographic researchers. The vast bulk of homeowners over age 65 have no mortgage debt, but they have limited incomes. On paper, the gains they've racked up in the resale values of their homes over the years give them a prosperous-looking net worth, often in the six figures.
Yet in reality they are living on small pensions and Social Security checks. This income is barely adequate to handle their basic expenses, and not enough for rising property tax bills, unexpected home-maintenance costs, unusual health-related expenses and the like.
They can't touch their home equity unless they're willing to take out a first or second mortgage, or cash in their chips by selling the house. Both options are distasteful to many older people. They don't want to move from their established neighborhoods and friends. They don't want to rent an apartment. And they don't want monthly debt. Period.
To help such owners, both Uncle Sam and the largest association in the country have just begun important new projects. The federal government is moving to create a demonstration program of insured "home-equity conversion mortgages" via the Federal Housing Administration (FHA).
The AARP has begun a market-research effort aimed at creating a privately insured equity-conversion financing plan, available at moderate cost to its millions of members. By this spring, AARP expects to have the market data it needs to design the specific equity-conversion financial products its members want most. An AARP-sponsored insured equity program -- if launched -- would join earlier AARP products, including health care, auto and homeowners' casualty insurance.
Here's a quick overview of both the FHA and AARP projects, plus a suggestion on where to obtain information on equity-conversion opportunities in your state or city:
The FHA program, authorized by Congress in December's housing bill, is intended to foster private lender involvement in equity-conversion mortgages. Over the next three years, the FHA will offer insurance on a variety of conversion concepts, ranging from "reverse mortgage" (under which banks pay borrowers sums of money every month) to floating lines of credit. The latter idea has equity-conversion experts particularly excited, since it would allow older homeowners to draw down only the amounts of cash they need, when they need them.
Like standard home-equity-based lines of credit offered widely by commercial banks and savings institutions, the new plan would provide for cash disbursements at either a fixed interest rate or a variable rate tied to an index. Unlike standard credit lines, however, the FHA-insured program would not require repayment of the principal and interest until "the homeowner's death, the sale of the home" or "other events" to be specified in regulations.
The FHA equity-conversion loans will also: Target owners 62 years and older, borrowing against single-family homes that fit the FHA's nationwide underwriting criteria on appraised value and maximum indebtedness. Permit "equity-sharing" arrangements between lender and borrower. In exchange for a lower rate, for instance, a lender might ask for 50 percent of the appreciation gained by a home from the date of the loan to the date of a resale.
Require independent counseling of all equity-conversion borrowers before they sign up, to ensure they fully understand the terms and consequences.
Look for proposed regulations on the new FHA program by late summer, followed by the first loans in subsequent months.
Equity-conversion plans at AARP are still at the conceptual stage, but the association's leadership is pushing hard for quick decisions. A senior staff member involved with the program, Katrinka Smith Sloan, said the key to the program in the coming months will be creating equity-conversion options with "great restraints" and "maximum flexibility for the consumer" that make sense to potential lenders and insurers as well.
With AARP's vast membership, financial clout and nonprofit motivation, it could dominate the equity-conversion field simply by jumping into it. For information, including current equity-conversion loan sources near you, write to AARP, Home Equity Conversion Center, 1909 K St. NW, Washington, D.C. 20049.