State’s Lenders Cool to Reverse Annuity Mortgages
A great theory . . . a great concept . . . tremendous public appeal . . . But. . . .
And, hung up on that “but,” like a beached whale, is the reverse annuity mortgage (RAM), one of those “great ideas whose time has not yet come” . . . at least in California.
Five years after the Federal Home Loan Bank Board, the governing agency of the savings and loan industry, approved the RAM as a means of allowing elderly homeowners to liquefy the equity in their homes--posting them as a lien against their estate in exchange for a monthly income--California’s lenders are still gingerly circling the concept and dipping into it only modestly as an exercise in community responsibility.
As a “product,” to be marketed aggressively, like any other type of loan, it is still dead in the water and seems destined to remain there. All of which is in sharp contrast to one New Jersey-based mortgage banker’s three-year attempt to market a packaged reverse annuity mortgage program, nationally, through large banks, savings and loan associations and savings banks, that has spread successfully through six Northeastern and Midwestern states.
Little Interest Shown
But its attempts to crack the rich California market--with more than 1.5 million homeowners over the age of 65 sitting on the most valuable housing in the country--have attracted little interest except for one, quickly aborted flicker last year.
A frustrated James Burke, president of American Homestead Mortgage in Mt. Laurel, N.J., said in a telephone interview, “A year ago we thought we’d be in California by now and, then, all of a sudden, the bank we were negotiating with just dropped the whole thing.
“Now, it looks like another year at least, even though with all of the know-how we’ve accumulated, we could give a California lender a turnkey operation, and it could be writing reverse annuity mortgages within six months of signing with us. But no one--absolutely no one--seems the least bit interested. And, frankly, it makes me a little mad. There’s all this big talk about ‘public service,’ but the very institutions out there that should be doing something like this won’t touch it.”
While Burke’s frustration is perhaps understandable, a survey of California lenders not only shows the majority of them sensitive to the plight of the elderly who badly need the equity out of their homes, but that at least two programs--one local and the other sponsored by the nonprofit San Francisco Development Fund--clearly predate American Homestead’s own involvement, and even the Federal Home Loan Bank Board’s 1981 recommendation on the subject.
Marketing Limits Seen
San Francisco’s Development Fund began studying the reverse annuity situation in 1980--a year before the FHLB addressed it--and wrote its first RAM just a year later. Since then, more than $25 million in such mortgages have been written, predominantly in the Bay Area, and parallel programs have since spread to Tucson, Boston, Milwaukee and Nassau County, N. Y.
On both philosophical and financial grounds, however, California lenders feel that as a financial tool the reverse annuity mortgage is a long way from being the broad marketing product in California that characterizes American Homestead’s approach.
Burke’s IRMA program (individual retirement mortgage account) acts as the conduit between lender and the elderly (over 62) homeowner who either owns a home free and clear or has a dominant equity in it. Based on age, value of the home and the extent of the equity, the homeowner receives a monthly annuity ranging from $100 to a maximum of $700 for life, is never forced to leave his home or repay the money advanced, and, at the time of the owner’s death, the lender exercises the option of selling the home to satisfy the debt or holding it as a lien against the homeowner’s estate.
What the lender gets out of all this is a cumulative 11 1/2% interest on the outstanding balance on the money advanced and 100% of any appreciation in the market value of the house during the life of the contract.
Program Being Spread
Beginning in New Jersey, American Homestead’s IRMA program is currently being offered also in Massachusetts, Connecticut, Pennsylvania, Maryland and, most recently, in Ohio through the marketing efforts of Columbus-based Bank One’s 350 branch offices.
Funding, so far (a $40-million commitment), has come through the giant, $18-billion Philadelphia Savings Fund Society and, more modestly, through New York state’s Empire Savings Bank. New York is the next state slated for the IRMA program.
From a hard-headed, dollars-and-cents standpoint, one S&L; executive, who requested anonymity said, “there are an awful lot of things about American Homestead’s arrangement--social need for it notwithstanding--that would give a lender here second thoughts if he’s accountable to shareholders.
“For one thing, it’s not only a fixed-interest loan, which is what got us into so much trouble in the early ‘80s, but it’s a deferred return, at that. You don’t get your money out of it for--how many?--years.
‘No Secondary Market’
“Also, of course, there’s no secondary market for reverse annuity mortgages, so if you write one, you’re stuck with it. And the appreciation in the value of the home that the lender would get is all very well, except that you can’t bet on there being any appreciation.”
And so, in California, the experimental work that had been done with the reverse annuity has approached it purely as a social-responsibility program of limited application rather than a “product” competing with conventional mortgages, mortgage refinancing, adjustable rate mortgages, development loans, auto refinancing and the like.
And, structurally, the mechanics of the relatively few California RAMs that have been written are sharply different from American Homestead’s. While the eastern program, for instance, is infinite--once drawn up, the RAM remains in effect until the annuitant’s death and the estate is probated--both of the California RAMs are for a specific term, a minimum of five years and a maximum of 10, at which time, if the annuitant is still living, refinancing must be undertaken.
At the same time, however, the California RAMs place no encumbrance on any future appreciation in the value of the annuitant’s home, unlike American Homestead’s where, at settlement time, the lender takes 100% of any appreciation.
‘Old and Frail’
“We’re familiar with Burke’s work in New Jersey, and we like what he is doing,” said Kathleen Kenny, assistant director of the San Francisco Development Fund, “and as a matter of fact, he built largely on our experience. Neither his approach, nor ours, though, is appropriate for everyone so we think there should be a range of options.
“Our ‘term’ approach works very well for a certain segment of the elderly--where the need for money is relatively short term and the annuitant is really old and frail. American Homestead’s plan, based on actuarial considerations, simply wouldn’t generate enough money to enable them to stay in their homes.”
American Homestead’s RAM provides for an annuity ranging from $100 to a maximum of $700 a month, but with the Development Fund plan--based on a
finite life of five to 10 years--the average monthly annuity is in the $700-to-$800 range.
And, unlike American Homestead, whose RAM program imposes no ceiling or floor income requirements on its annuitants, the San Francisco plan is aimed primarily at the “low and moderate income elderly,” Kenny adds.
“Depending on the area in which they live, that means the RAM is available only to those with a maximum income of roughly $25,000 a year for the single elderly, or $30,000 for a couple. We have to screen out a lot of them simply because we know an annuity for them would create more problems than it would solve.”
The San Francisco RAM has also been the model for the Sacramento Home Loan Counseling Center’s program, begun at about the same time, which is sponsored by 16 savings institutions and spearheaded by Capital Federal Savings & Loan and Sacramento Savings & Loan Assn.
Even older and more geriatric oriented than the San Francisco Development Fund’s RAM, however, is Wanda Sawyers’ virtually unknown work in the same field through her nonprofit and independent Life Services Inc., in Burbank. Unlike the Development Fund, however, the use of the reverse annuity mortgage is really incidental to Life Services’ principal goal which, in Sawyers’ words “is to enhance the quality of life for the elderly through counseling, financial and health management, estate management, the management of financial portfolios--sometimes on a contractual basis, sometimes through a power-of-attorney setup and sometimes as a conservatorship.”
The concept of the reverse annuity mortgage, which she prefers to call a simple “home equity mortgage,” actually came to her in 1978, when she spun off from her job with the city as the creator and director of Los Angeles’ first multipurpose senior citizens’ center and established Life Services.
Rules Were Relaxed
“But at that time, in ‘78, the laws were entirely too restrictive to make a mortgage of this kind practical. I had the outline of what I wanted to do in mind, but it wasn’t until ’81 that the rules were relaxed enough to make it possible. And I looked at the San Francisco concept, of course, but it didn’t fit our needs.”
What evolved with Sawyers was “really a program, not for the frail elderly, as in San Francisco, but what I would call the elderly elderly--those who can live in their home with only minimal outside help--for as long as possible. That’s the only criterion. Their income has very little, if anything, to do with it, although, in actuality, they do have very little.
“As it turned out, the target group wasn’t at all what I thought it would be. I thought it would be with the elderly having a home in the $100,000 to $150,000 range.
“It turned out to be closer to homes in the $350,000 to $500,000 range and we have one aged applicant with a home appraised at $1.5 million.
“Most of these people retired with what seemed like an adequate income at the time, but inflation has eaten away at their assets until the home is about the only thing they have left. We have one 92-year-old lady with a very valuable house, but she held a job where Social Security was optional--that’s hard to believe today--and so her only income now is a $192-a-month pension. She had other assets but has lived them up over the years.”
‘Need for Even More’
“Wanda came to us about three years ago with her reverse annuity mortgage which she saw as a sort of bridge financing tool as a means of keeping the elderly in a familiar surrounding--their home--for as long as possible,” Hugh Loftus, a Security Pacific National Bank vice president in community relations, said. “We committed $2 million to her program, and she placed about 25 loans, and then we increased it another $1 million. But there’s need for even more, and so we’ve turned our attention to trying to get other lenders involved as well.”
And, in the process, struck a responsive chord with California Federal Savings & Loan’s senior vice president for residential loan production, Warren Raybould.
“We’re a part of the community, and housing is our forte, of course,” Raybould says. “The only trick is to balance the business we’re in--we’re a profit business, stock owned, and we have a responsibility to our shareholders--with our responsibility to the community. But we like Life Services’ program, and although we haven’t signed a commitment yet, it looks like we’re going to recommend that we do.”
What both Security Pacific’s Loftus and CalFed’s Raybould find particularly attractive about Life Services’ RAM is--significantly--Life Services, itself.
Fills Third-Party Role
“We like the independent, third party role,” Raybould says. “Life Services acts as the intermediary, qualifies the individual, does all of the counseling, and the lender only provides the finances.”
“And the counseling,” Loftus adds, “is extremely thorough--not only with the annuitant, but with all of the members of the family, too. That’s very important to us. We could be in an indefensible position without it.”
As a strictly neutral third party almost entirely engaged in screening, qualifying and counseling, Life Services is apparently filling the role that one of the state’s biggest believers in the RAM finds missing in most such arrangements.
While the San Francisco Development Fund, since its inception in 1981, has had support from some of the largest lenders in the state--Crocker, Bank of America, Wells Fargo and and First Nationwide Savings--it has been the latter that has been most steadfast in that support. A support, however, that is beginning to flag.
‘We’ve Been the Leader’
“I’ve been a crusader for these loans for a long time,” Anthony M. Frank, chief executive officer of the $11-billion San Francisco-based First Nationwide, says “and these words come hard for me, but, frankly, we’re discouraged.
“We’ve been the leader and it’s been highly satisfying--we know that we’ve aided many, many people by giving them a better life. And it’s a good feeling. But it’s not going well and we’re really going to have to put the reverse annuity mortgage on the back burner for awhile.”
While the unpredictability of future interest rates and the current backlog of other, more pressing lending business are two concerns cited by Frank, the absence of a viable third party, “a smoother-outer,” as he describes it, also weighs heavily on him.
“These are intensely personal loans requiring a lot of time by some very skilled people. They’re not something you can run through an existing system. Everyone of them has to be tailored . . . they have heirs and advisers who have to be consulted and it just gets very, very complex.”
Cites Different Philosophy
And in no way, Frank feels, are California lenders ready for the “market product” approach to the RAM that Burke’s American Homestead Mortgage is spearheading in the Northeast.
“I guess there’s an entirely different philosophy involved, Frank said. “Maybe, in the East, they’re more willing to take the appreciation in someone’s home as a part of the deal. I’m not. Where’s the incentive to keep up the appreciation in the home? I don’t want to play the actuarial curve with anybody. Are you going to use a voodoo doll as your collection tool?”
“It’s too bad, because there is an enormous necessity for these sorts of loans, and it’s going to get even more so in the future as the demographics change and society gets older. . . .
“But, frankly, we’re not there yet. It’s not a perfected instrument.” “No one seems to be the least bit interested. Frankly, it makes me a little mad.”
“There’s no secondary market. . . so if you write one, you’re stuck with it.”
