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April 28, 1978

Mortgage for the Elderly
American homeowners, especially elderly homeowners, have become increasingly aroused over the
paradoxical situation they face - beset
by escalating property taxes and
home costs, yet unable to realize the
increased equity value of their homes
while still living in them. Their hopes
may be raised, however, by a recent
little-publicized ruling of- California's
regulatory authorities, authorizing
state-chartered savings-and-Ioan associations to offer reverse-annuity mortgages. California S&L's are well-known
for their innovative spirit, so any experience they may gain with this new
mortgage instrument will be carefully
watched at the national level.
The reverse-annuity mortgage, if administered with proper safeguards, has
great potential for alleviating economic and psychological strains on older
homeowners. By allowing the borrower to draw upon the increased
uity value in his or her home in the
form of an annuity, this mortgage instrument provides a supplemental
source of income which could prolong
home residency. Availability of this
type of financing also could help control welfare costs by reducing the
need for special subsidies to the elderly. But at the same time, a significant
lengthening in the duration of home
occupancy by the older age group
would reduce the stock of single-family housing available for younger
home-seekers, and could thus stimu-

late even heavier demand pressure
for this currently most popular form of
housing.
The numbers involved suggest a large
potential market nationwide for reverse-annuity mortgages. In 1976,
there were 10.5 million homeowners
in the 65-and-over age bracket (see
chart). Homeowners accounted for
71 percent of all households in this age
bracket - only slightly below the 75percent homeownership share in the
35-64 age group.

How it works
The California Savingsand Loan Department, by a regulatory order effective February 10, 1978, permitted
state-licensed savings-and-Ioan associations to experiment over a four-year
period with certain mortgage instruments - including the reverse-annuity
loan - as alternatives to the conventional fixed-rate mortgage. The reverse-annuity mortgage would be
unamortizednd would be payable in
a
full only upon the borrower's death or
sale of the property. In the case of
joint borrowers, the loan would be
payable upon the death of the last surviving borrower. Incidentally, the
amount of the loan could not exceed
95 percent of the property's market
value.
Under the loan agreement, the borrower receives payments from an annuity which the lenderpurchases from

(continued on page 2)

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a life insurance company. These annuity payments are net of the loan-interest payments, which the insurance
company deducts and pays directly to
the lender. The annuity may be for a
specified term or for life. However, the
payments may be deferred for a
specified number of years, although
the lender may make some loan advances to the borrower during that deferred period.
The reverse-annuity mortgage is designed for the homeowner who has a
substantial equity in his home or has
paid off any prior mortgage. For
homeowners selecting a life annuity,
the bider borroWer has an advantage
over the younger homeowner of higher monthly payments because of actuarial considerations. But an agreement
of this type could be confusing for elderly borrowers, so the new regulations require the lender to provide the
borrower with complete information
regarding the gross and net annuity to
be received and the amount of debt to
be collected at death or on the prior
sale of the property. Where the debt
rises over time, the lender must also
provide a complete monthly-debt
schedule. In addition, each lender offering alternative mortgage instruments must make descriptive
pamphlets, approved by the S&L
Commissioner, available to prospective borrowers.

Advantages
In many areas of the nation, particularly
in California, property values have
skyrocketed in recent years - and
property taxes have skyrocketed with
them. Many elderly homeowners, living on relatively fixed incomes, have
been hard-pressed to meet rising property taxes and home-maintenance
costs, despite (in many cases) severalfold increases in the market value of
their homes. For these individuals, the
reverse-annuity mortgage would provide a supplemental source of income
to meet their higher costs. With these
supplemental payments, they could
continue to live in their present homes
and would not have to relocate elsewhere. Aside from economic benefits,
this type of financing would avoid the
psychological traumas involved when
older people are uprooted from their
accustomed environment and friends.
Availability of reverse-annuity mort-:gages might also be advantageous for
taxpayers generally. The provision of
annuity-loan income to senior citizens
and the avoidance of the problems associated with forced home sales could
reduce welfare costs for the elderly.
(There is a cloudy legal issue, however, as to whether loan-annuity payments would affect a borrower's
eligibility for Medicaid or Supplemental
Security Income.) This type of mortgage instrument also could obviate the

need for some special legislative programs, such as California's current provision for delayed real-estate tax
payments for certain older
homeowners.

Other implications
Escalating property taxes and maintenance costs have made home-ownership uneconomic for mal'"!yolder
persons, and thus have helped to free
up a growing proportion of the housing stock for younger home-seekers.
But the reverse annuity, by lengthening the period of home occupancy for
the older age group, could significantly reduce the housing stock available to
other age groups. In some areas, single-family houses are already in short
supply, with strong demand pressures
contributing significantly to the rapid
rise in home prices. In California, with
its 1.8 million residents in the 65-andover age group, widespread availability of reverse-annuity mortgages could
place further pressure on available

housing, to the disadvantage of younger residents and in-migrants seeking
housing.
All of these considerations may be
academic at the present time, as none
of the California state-chartered associations have yet implemented the authority to offer reverse-annuity
mortgages. Because of the innovative
nature of this instrument, however,
substantial lead-time for implementation can be expected. Moreover, the
current mortgage environment may
also suggest caution. Savings-and-Ioan
associations are presently faced with
reduced savings inflow at a time of
record mortgage commitments. Until
forward commitments are brought
into better balance with primary
sources of funds, S&L's are not likely
to begin an experiment with a new
loan instrument that will open up a
whole new dimension in mortgage
demand.

Millions

Percent

30

80

o

Number of Owners

Under 35-64
35

Age
3

65 and
over

Percent Owners

Under
35

35-64

Age

65 and
over

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BANKING
DATA-TWELFTH
FEDERAL
RESERVE
DISTRICT
(Dollar amounts in millions)
Selected Assetsand liabilities
large Commercial Banks

Amount
Outstanding

Change
from

4/12178

Change from
year ago .
Dollar
Percent

4/5178

Loans(gross,adjusted)and investment?:
Loans(gross,adjusted)- total
Securityloans
Commercialand industrial
Realestate
Consumerinstalment
U.S.Treasurysecurities
Other securities
Deposits(lesscashitems)- total*
Demand deposits(adjusted)
U.s. Government deposits
Time deposits- total*
Statesand political subdivisions
Savingsdeposits
Other time deposits:j:
LargenegotiableCD's

109,714
86,525
2,137
26,610
29,127
15,278
8,364
14,825
106,729
30,775
358
73,869
6,455
31,800
33,167
14,840

Weekly Averages
of Daily Figures

Week ended

Week ended

4/12178

4/5178

Member Bank ReservePosition
Excess
Reserves(+)/Deficiency
(-)
Borrowings
Net free(+)/Net borrowed (-)
federal funds-:-Sevenlarge Banks
InterbankFederalfund transactions
Net purchases(+ )/Net sales(
-)
Transactions
with U.s: security dealers
Net loans (+)/Net borrowings (-)

-

-

-

-

-

-

274
322
539
214
156
42
268
328
910
132
239
522
100
266
190
327

-

-

12,019
12,684
682
3,026
6,506
2,794
2,130
1,465
10,509
2,127
58
8,212
1,135
301
7,107
5,336

-

-

12.30
17.18
24.19
12.83
28.76
22.38
20.30
10.97
10.92
7.42
19.33
12.51
21.33
0.94
27.27
56.14

Comparable
year-agoperiod
+

+

103
15
87

+

332

+ 1,468

57
16
73

+

+ 1,951

111
467
+
+
*Includesitems not shown separately.:j:lndividuals,
partnershipsand corporations.

+

17
0
17

+ 1105

Editorial comments may be addressedto the editor (William Burke) or to the author.•..
Information on this and other publications can be obtained by calling or writing the Public Information
Section,FederalReserve
Bankof SanFrancisco, O. Box 7702,SanFrancisco
P.
94120.Phone (415) 544-2184.