Return of reverse mortgages
For many senior living operators, shrinking demand is not likely to be a problem in the decades ahead. After all, about 10,000 baby boomers turn 65 every day, and the pace is heating up.
But there can be a big difference between prospects and paying customers. Fewer than half of new retirees have the financial wherewithal that's needed to cover the basics in older age, according to a variety of financial planning analysts. In fact, 60% have less than $100,000 in retirement savings, notes brokerage firm Charles Schwab.
Meanwhile, pensions are evaporating, and there is mounting pressure on lawmakers to delay and/or reduce Social Security payouts. Small wonder so many operators are wondering where the money will come from.
Ironically, a funding mechanism that had been all but kicked to the curb appears to be making a comeback: the reverse mortgage. Consumers took out $15.3 billion in reverse mortgage loans in 2013, according to Inside Mortgage Finance. That's a 20% year-over-year increase. Not bad for an option that was looking like it might be facing extinction a few years ago.
Technically, a reverse mortgage works more like a loan. Homeowners who are age 62 or older can borrow against the equity in their home. They are not required to make repayments until they sell the home or die. In between, they can tap into thousands and thousands of dollars that can be used for nursing home care or other senior living services.
With 77 million or so baby boomers about to enter the retirement pipeline, this could mean many more billions of dollars pouring into the sector. This tool poses little risk to providers. But many lenders view them warily, particularly in the wake of the most recent housing-market collapse. In an effort to draw down risk, the FHA now limits the amount a homeowner can borrow as a lump sum to 60% in the first year, up to a maximum cap of $625,500. That still sounds a whole lot better than zero dollars.
To be sure, reverse mortgages are no panacea. But as veteran sailors will tell you, any port is welcome in a storm.