Net worth: $150,000. Monthly income: $450 and all of it from Social Security.
It’s the commonness of this litany among the country’s “land poor” elderly, that has swamped the New York City offices of Prudential-Bache Securities with hundreds of inquiries since the Los Angeles Times’ story last September describing that company’s lonely entry into the “reverse annuity” field. The plan, known as the Individual Retirement Mortgage Account (IRMA), is administered by Prudential-Bache Mortgage Services Inc., a subsidiary.
“We’ve had a tremendous reception to the pilot plan and we’ve got drawers and drawers full of letters wanting to know more about it, and when it will be available in their area,” Chris Howard, staff assistant to vice president John F. Settel, said. Bettel heads what the giant securities firm sees, eventually, as a nationwide financial network allowing older homeowners with a heavy equity in their home to “cash in” on that equity.
While the concept of the reverse annuity mortgage has been around since 1981 when the Federal Home Loan Bank Board authorized the country’s savings and loan associations to write them on an experimental basis, only a few isolated ones have done so. Already in a cash bind at the time, the S&Ls; saw little advantage in toying with an untried idea obligating them to lay out monthly payments to homeowners for an unknown number of years before getting their money, and their profit, out of the venture.
The decision, last fall, on the part of the New York-based, $76-billion securities firm to enter the--charitably--uncrowded field was made, Settel said at the time, “because we were looking for a product that would serve the needs of the elderly, allow us a reasonable return on our investment and bring us into the broad, open market of the retired, rather than dealing only with the affluent.”
Since September, Howard said, “the pilot program in New Jersey has gone quite well with, so far, about 168 mortgages having been written, and we consider it quite successful.”
In a couple of weeks, she added, the “expansion plans should be firmed up"--how far, how fast, and in what geographic areas, the reverse annuity mortgages will be offered next.
“We’re looking at Connecticut next and then Florida and then--hopefully, as early as June--we should be moving into California,” Howard added.
Here are the highlights of Prudential-Bache’s IRMA plan:
--The lifetime annuities range from a minimum of $100 a month to a maximum of $700, tax-free, based on the age of the homeowner, the home’s market value and the owner’s equity in it.
--The owner must be 62, or older. In jointly-held property, the younger partner must be at least 62.
--The entire property need not be committed to the plan.
--No credit report, income statement or financial records are required and the homeowner is never required to make any repayments during occupancy of the home.
--In addition to the monthly annuity, a lump-sum, cash advance is also possible.
--The homeowner will never be required to leave the home and the owner’s heirs will never owe anything even if Prudential-Bache’s pay-out vastly exceed the value of the home at the time of death.
--IRMA’s interest rate is a flat 11 1/2% on the cumulative, outstanding balance.
--Prudential-Bache Mortgage, in addition to the interest levied, pockets 100% of the appreciation in the value of the property if fully committed to the plan, or 100% of the appreciation of that portion of the equity committed to it.
(Rather than commit the entire home to the plan, homeowners who require a lesser amount of money to flesh out other monthly income have the option of committing only enough of their equity to satisfy this need. If, Settel said in illustration, the home would normally qualify the homeowner for a $500-a-month reverse annuity, but only $200 is needed--representing 40% of the equity--then, at the time of the occupant’s death, Prudential-Bache would pocket only 40% of the appreciation in the value of the home.)
How age and value of the property affect the amount of the annuity can be seen in the following example in which the home is owned, free and clear, and the homeowner receives the maximum monthly annuity of $700:
--An 80-year-old with a house valued at $100,000.
--A 75-year-old with a house valued at $140,000.
--A 67-year-old with a house valued at $200,000.
At the time of Settel’s announcement of the IRMA program last September, he said: “All the way along, we’ve had just one criterion--that whatever project we undertook must do some social good. And that’s not normally realized in a real estate project.”
More information can be obtained from Prudential-bache Securities, 100 gold St., New York, N.Y. 10292.