Calhouns Can(n)ons

Show Me Da Money!

As folks here in Los Osos know, there’s a Sewer Bill coming down the pike that may force an unknown number of residents to sell their homes and move out of town. Especially hard hit will be people on fixed incomes. I checked a few months ago with Chrys Barnes of Pacific Capitol Mortgage, here in Los Osos, since I had plans on writing a column on the issue and she gave me a great deal of information. In addition, homeowners here in Sewerville were recently mailed an invitation by True Compass Lending Corporation in Paso Robles to attend a seminar on Reverse Mortgages (and, thank you, a tasty free lunch) at the Madonna Inn on May 5th. Katie Bateman gave the seminar, about 20 people and I showed up and, as promised, here’s some of my notes:

First and foremost, there’s an enormous amount of information out there on reverse mortgages. Here’s some email address for further investigation:
Fannie Mae (FHA/HUD is the approved lender): www.fanniemae.com
Hud: www.hud.gov/buying/rvrsmort.cfm
NRMLA – National Reverse Mortgage Lender’s Association: www.reversemortgage.org
AARP: www.aarp.org/money/revmort
NCHEC- National Cneter for Home Equity Conversion: www.reverse.org
The National Council on Ageing: www.ncoa.org
Katie Bateman (who gave the seminar): www.kbateman.com (423-3112) or here in Los Osos, Chrys Barnes, Chrysb52@hotmail.com from Pacific Capitol Mortgage (528-5353). And there are many other companies offering these mortgages .

And, at the county, John Diodoti, at the Public Works Department, is working on money/finance/help issues and you can call him at 788-2832. He’s working not only on various grants, but also grants that will help low-income folks on hook-up costs & etc.

Now the caveats: Reverse Mortgages are something that each person needs to look into carefully. They certainly aren’t for everyone, they need to be weighted carefully in light of each person’s individual personal and financial situation. However, the rules and safeguards and variety of options now in place can make this method of staying in your home a viable option for many people.

When I spoke to people about RMs, the most frequent response I heard was the fear that the RM would eat up their home leaving nothing for the kids. Or the bank would take away their home and they’d be shoved out on the street. In the bad old days of no independent oversight, unscrupulous loan-writers, and for people who lived in areas where homes not only didn’t appreciate but actually depreciated as the years went by, that could certainly be the case.(Except for the “thrown out of house” part. That doesn’t happen, unless you’re actually dead and/or you haven’t been in the home for a year (i.e. in nursing home, for example) and won’t be returning.)

But here on the Gold Coast, where for the last 20 years, bubble excluded, the average house appreciation rate was pegged at about 5% by the county realtors association, and with the variety of types of loans available (from lump sum fixed rate to to lines of credit type loans or other combos) and the required counseling and review session provided by a neutral HUD-sponsored counselor before any loan papers can be signed, and prudent evaluation by the individual, the chance of that happening is slim. (Yes, I suppose somebody could max out their equity, blow it all in Vegas, then when trouble hit, be left bereft, but if someone’s that imprudent, that scenario would happen in any case.)

So, with that in mind, some info from the Seminar:

Misconceptions
Lender owns your home; You’ll have no estate left; Bank shares in the appreciation of your home; Can’t qualify due to poor credit (this one carries a footnote – if you’re over leveraged, you wouldn’t have any equity left and since the loan amount is based on equity, you’d be out of luck); You have to be debt free; You’ll end up owing more than what the house is worth; It will impact your Social Security & Medicare (again a footnote; if you’ve got disability payments and/or on Medicaid/state aid programs, would have to check regarding assets allowed under those programs); Only desperate people get reverse mortgages (O.k. here in Sewerville, I’d have to agree; there’s going to be a lot of desperate people when the bill arrives.)

What is a Reverse Mortgage?

Allows homeowners 62 and older to convert home equity into cash (or line of credit, etc.)
Is not paid back until the last borrower in the home no longer lives there (i.e. if you die, your spouse can continue to live in the home until they leave permanently or die)
No monthly repayments
Money is tax free
No income or credit requirements to qualify
Non-recourse loan

The amount of money you can get is based on:
Age of the youngest borrower (the older you are the more money you can get since the bank knows you’ll die sooner and so their loan will be paid back quicker, unless you’re 92 and your wife is 37, maybe)
The amount is base on the appraised value of the home or the National lending (maximum) limit which is currently pegged at $625, 500 (until Dec 31, unless it’s extended; if not the cap will return to $425,000 which was the cap before the recent “Recovery Act” legislation)
There are no credit or income qualifications.

Payout Options
Lump sum
Monthly Income or Tenure payment
Line of Credit
Any combination of the 3 above
The loans can be either HECM Monthly ARM: Index based on 1 month Libor or 1 Year T-bill, or HECM Annual ARM: Index based on the 1 year T-Bill or HECM Fixed Rate: live pricing
There’s even a new type of RM loan specifically set up so that it can be set up to enable you to use an RM to buy a new home (like a down payment, the amount repaid when the old home sells & etc.) if you’re planning on relocating anyway.

Costs
Interest rates: 1 year CMT (treasury bill) index or 1 month Libor
Fees are capped
Mortgage Insurance (2% of appraised value or lending limit or appraised value, whichever is less)
Origination fee
Closing costs (similar to any mortgage application)
The loan costs can be added to the RM or can be paid out of pocket, whichever

How is RM Repaid
An RM is, in many ways, just like a regular mortgage. When the last borrower no longer lives in the home, the loan is due in one lump sum. The estate or Heirs can: Sell the house, pay off the RM (just as they would if the home had a regular mortgage) and keep the difference or refinance the amount owed and keep the house. The bank does not take the house. Also, you can always re-pay the RM, supposing you win the lottery or your dear old uncle Herbert dies and leaves you a nice chunk of money. And you can refinance an RM, (i.e increase the amount borrowed, say if further down the line you ran into medical expenses, for example) since as your equity grows, so does the available line of credit, if you need it.

For folks over 62 who are house rich but cash poor and who cannot pay the sewer fees, an RM is certainly one option (Another option is if they financially qualify to have their annual tax bill held in abeyance until they die or sell the house, could allow them to put a hold one bill thereby leaving some money available for the other bill, a sort of owe Peter, pay Paul deal. Of course, the property tax abeyance program is also a kind of RM run by the state, by which they hold the property tax and charge compounded interest on it, and after 20 years, like a RM, a large chunk of amortized change will be owed by the heirs when the house is sold. ) Or they can move, which carries with it high costs, not to mention social dislocation. And, selling in today’s bubble-depressed market, rather than waiting, say, 10 years, could really cost an even bigger bundle.

A Simple Example

My thanks to Ms. Bateman who prepared the following scenario: Mr. Sewer Guy, 65 years old, owns free and clear home valued at $400,000, (according to a local Los Osos realtor, the “average” post-bubble Los Osos home is now $300,000, but these numbers were run on a $400,000 sample), HECM Libor 3.250, rate is monthly adjustable, margin is 3.25% and the rate can never exceed 13.66%m calculation assumes an annual growth rate of 4% for value of home.

Guestimate “Sewer Bill” payoff: $25,000, Insurance Fees $8,000, Financing Fees, $8,074. (8+8,074=$16,074 these are like “closing” fees) so a total of $41,074 is financed for 20 years, with a remaining line of credit of $186,292 (which will grow as the house appreciates and Mr. Sewer Guy ages). Total, guestimate of amortized amount owed at the end of 20 years using these parameters :$181,431.

Meanwhile: Home value: $400,000 x 4% appreciation a year = $16,000 x 20 years = $320,000. $400,000 = $320,000 = $720,000. Is it reasonable to assume that in twenty years a house worth $400,000 today would sell for $720,000? Especially here on the Gold Coast? If so, Mr. Sewer Guy would live there for twenty years, sell his house, pay off the $181,431 Reverse Mortgage, and still leave his heirs $538,569. 00. Or, get very conservative and figure house appreciation at 3% (the low end for this county as a whole). Either way, Mr. Sewer Guy leaves his heirs a nice chunk of money and still gets to stay in his home 20 years. (Ironically enough, using these figures and looking at the bubble-crashed real estate market right now or by August 10, 2010 (when the assessment officially is locked in on the tax bills), Mr. Sewer Guy might well come out worse if he is forced to sell his house in today’s market rather than taking out an expensive RM and waiting 20 years. Or even 10 years. And, yes, we could have another housing bubble crash in 20 years, since we seem to have them as regularly as swallows return to Capistrano. But perhaps Mr. Sewer Guy would recognize the signs and sell and move at the next Bubble High End, and so still come out ahead.)

According to John Diodati, the most likely deadline before the sewer bill shows up on your tax bill will be shortly on or about or prior to August, 2010. Furthermore, the county plans on offering homeowners a chance to pay the cost up-front, if they wish. Prior to Aug 10, 2010, they’ll also have a “final” “real” price tag. (Right now, people can mail the County a flat $25,000 which will be held in an escrow account, the actual amount removed on Aug 20, 2010, when it’s known, and the rest refunded. If the County refuses to take the project, the entire amount will be returned, and we'll ALL be out on the street.)

So, to any Los Osos homeowner 62 or older, who’s house rich and cash poor and facing being booted out of town with the rest of the riff-raff when the sewer bills start arriving, I would suggest now’s the time to do some serious investigation and number crunching. Folks offering RM’s are happy to sit down with you and run your individual numbers and look at your personal situation and discuss the different options available, all with no obligation.

Do RM’s cost a lot of money in order to get money? Yep. Does selling a house and moving cost money? Yep. Does the sewer cost money? Yep. Is forcing old folks to take out a Reverse Mortgage just to pay a sewer bill right? Nope. But it is what it is. And it is filled with terrible irony.

Years ago, before the so-called “Reagan Revolution,” Americans considered these large infrastructure projects as part of the “National Commons,” and taxpayers all over the country paid taxes to the Feds who then made those monies available to communities all over the nation to help offset some of their more onerous infrastructure projects. But Americans changed that process. They didn’t like taxes. President Reagan said the government was the problem. So they wanted everyone to “bootstrap” it all by themselves. Privatize or what President Obama called “the ownership society – you’re on your own.” So a lot of federal help disappeared. And now that Los Osos taxpayers, many of whom, paid taxes over the years to help a county in Missouri build their water system, and now expects those nice Missourian taxpayers to help pay for our sewer project, well, Los Ososians, you’re out of luck. Tough. Unless, we get lucky and some new Federal help actually can be located. If not, then the wind that dismantled The Commons that voters sowed for the past 20-some years has now returned to Los Osos in the form of a destructive privatized whirlwind.

Time to get serious about battening down the hatches and start now to look into various survival mode options. The clock is ticking.