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.