Caring for the Disabled Elderly: Who Will Pay?

By Alice M. Rivlin; Joshua M. Wiener et al. | Go to book overview

Chapter Eight
Home Equity Conversions

The vast majority of the elderly, including the poor, have substantial assets in their homes. Approximately three-quarters of all elderly households own their own homes in 1986-90, with an average net home equity value of $54,000 in 1987 dollars. 1 This asset, however, is illiquid and cannot readily be used without sale of the house and relocation by the homeowner. As a result, the elderly live too poor and die too rich.

Home equity conversions allow elderly homeowners to transform this illiquid asset into a stream of income or readily available cash, which could help them to purchase long-term care services or insurance policies. Although home equity conversion plans can take various forms, the basic concept explored in this chapter is the reverse mortgage, in which the bank gives the homeowner a loan, usually in the form of monthly installments. At some time in the future, preferably after his or her death, the homeowner or heirs repay the loan and its interest, using the proceeds from the sale of the home.

There are few existing reverse mortgages--perhaps 2,000 transactions had been closed as of 1987.* Although the number of elderly home-

____________________
*
As of September 1987 the two programs drawing the most attention--the reverse annuity mortgage (RAM) program and the American Homestead Mortgage Corporation (AHMC) individual retirement mortgage account (IRMA)--had completed about 400 and 1,200 transactions, respectively. (The IRMA was previously called the Century Plan.) Among the quasi-public programs are the Connecticut Housing Finance Authority reverse mortgage program (191 loans), the Buffalo HELP program (65 transactions), and the elderly home equity program sponsored jointly by the Rhode Island Housing and Mortgage Finance Authority Corporation and the Rhode Island Department of Elderly Affairs (60 loans). The number of transactions taking place outside of these programs has not been substantial. Maurice D. Weinrobe, Clark University, personal communication, October 6, 1987; Frank Engel, financial planner, American Homestead Mortgage

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