Call it a "nest egg" without the "egg."
That's what a "home" is for about 30 million Americans over the age of 62, and for the average senior matching this description, a full 70% of the net worth involved is represented by the equity in one's nest. With the possible exception of dimples, it's probably the most illiquid asset an individual can have.
The only way to capitalize on a lifetime of thrift: sell the house.
But since 1981, when the Federal Home Loan Bank Board authorized savings and loan associations under its control to write reverse annuity mortgages on an experimental basis--to thundering disinterest--one timid approach after another to the problem of liquefying the equity in a senior citizen's home has faltered and either died or plodded along; the number of such mortgages written could be counted on the fingers of one hand.
The latest casualty: Giant Prudential-Bache Securities' brave plan, announced last September, to go nationwide with its IRMA (Individual Retirement Mortgage Account) program--victim of an ambitious distribution network that didn't work.
The good news: IRMA is alive and well, back in the hands of American Homestead Mortgage Corp., the mortgage banking firm that invented it in the first place (and has implemented hundreds of such reverse annuity mortgages), and the program should be available in California "no later than early next year."
Essentially, any reverse annuity mortgage presupposes a lender taking title (but not possession) of an older homeowner's property--either owned outright by the senior citizen or with a very big equity in it--and paying the homeowner X dollars a month (based on a formula of his age, the value of the home and the extent of his equity in it) for as long as he lives.
At the homeowner'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.
The homeowner is never forced to move--no matter how wildly he or she exceeds the actuarial tables on probable life expectancy--and the heirs never owe the lender any additional money, no matter how grossly the monthly pay-outs to the homeowner may exceed the value of the home at the time of the occupant's death.
If the IRMA program, in particular, was so workable, why did giant Prudential-Bache Securities abandon it after just nine months?
'Out of Sync'
A disappointed John F. Settel, senior vice president of the New York-based firm, explains: "The distribution network and the market were simply out of sync. We were using our account executives to market IRMA but they, in turn, were dealing with a market sector that wasn't used to this kind of product. We thought that we would be dealing with people who could use it, would have homes of considerable value and would be reasonably affluent.
"We were wrong. The average home price turned out to be about $80,000 and the average age about 75--which was understandable--but their income was low. And so, with a great deal of unhappiness, we concluded that the program was much more applicable through local banks."
And it was through local banks that American Homestead Mortgage Corp. had been marketing IRMA for several months before Prudential-Bache came on the scene.
"We had our misgivings about their marketing approach," according to James Burke, president of the Mt. Laurel, N.J., firm, "but they have 3,000 brokers, nationwide, and so, even if they had written one IRMA apiece in a year's time, it would have been a considerable volume. And so we decided, 'What's to lose?' We entered into a nine-month exclusive contract with Prudential but, in that time, they referred only 30 mortgages to us. Their people tend to be young and aggressive and far more interested in selling pork bellies and silver futures than in dealing with old people.
'A Great Program'
"And so, we parted company sorrowfully, because it's a great program, and Jim Settel is a wonderful person who threw himself into it 100%--making speeches on it, appearing on TV talk shows, everything. But we split by mutual agreement--the single-provider approach simply didn't work."
As reconstructed, however, IRMA will go back to American Homestead's original approach--through large banks in each of the states it enters.
"We're just in New Jersey now because that's where we are," Burke said, "but by the third quarter of the year we'll be in what we call the 'Amtrak corridor,' except for New York. That's Pennsylvania, Massachusetts and Connecticut.
"The hold-up in New York is because of one of those typical New York situations: the thing that really made IRMA possible on a big scale was the Garn-St. Germain Act which was signed into law in 1982, and completely restructured the entire financial community. Included in it were a couple of pages that took away all of the problems in all 50 states that had faced the reverse mortgage with shared appreciation before--questions dealing with the due-on-sale clause, preemptive liens, and so forth."