Archive for January, 2011

FIT for Reverse Mortgage Lenders, part 10

Thursday, January 20th, 2011

 Long-term Care Costs Risk

 

 Seniors who struggle with basic activities of living daily (BALD) may have to use reverse mortgage funds to pay for help to stay at home long enough to benefit from the loan.

And these long-term care (LTC) costs could burn-through their reverse mortgage funds, inviting defaults on essential borrower obligations and defeating the long-term age-in-place purpose of reverse mortgages.

What are the basic activities of living daily? Why will many seniors have difficulties with them? What do these serious, life-stage financial risks mean for seniors, lenders, and HUD?

Basic activities of living daily include eating, toileting, bathing, dressing, and moving in and out of a chair or a bed. While we may not even recognize the performance of these activities when we are young and vigorous, as we age and physical frailty becomes our companion, they can become a challenge.

Many seniors struggle with BALD because of chronic health conditions normally associated with aging. Among these health conditions are arthritis, diabetes, heart disease, falls and injuries, osteoporosis, and obesity.

A National Governors Association report says more than 80 percent of seniors aged 65 and older has at least one chronic health condition, calling them the “leading causes of disability among seniors.” [1]

Researchers at the University of Michigan Health Systems found that 50 percent of seniors have a “moderate to severe” form of “geriatric conditions” such as cognitive impairment, falls, incontinence, low body mass index, dizziness, and vision and hearing impairments. [2]

Significantly for our purpose here, they also found a link between the existence of these geriatric conditions and dependence on others for help with BALD. Among seniors without geriatric headaches, only 2.6 percent were dependent on others for help with BALD. For those with one condition, the percentage climbed to 8.1; with two conditions, it soared to 19.4 percent, and it zoomed to 45 percent for those with three or more conditions.

Overall, the study says 39 percent of seniors aged 65 to 69 have one or more the geriatric conditions. So what does this mean for lenders?

It means originators should take time to discuss FIT “yellow flags” 8 and 9 with customers if they show up in customers’ FIT summaries from counseling. For seniors struggling with BALD or with a history of falls and injuries, here are some potential implications for their reverse mortgage funds they should be aware of:

  • They may find it hard to stay at home and benefit from their reverse mortgage funds without help;
  • They may struggle to do home repairs, pay taxes, insurance, and other bills;
  • They may have to pay for help to remain at home;
  • Payment for help can rapidly consume reverse mortgage funds;
  • They run risk of defaulting on essential borrower obligations as funds are used to pay for home help.

And for lenders and HUD, implications of seniors struggling with BALD could include:

  • Escalation in tax and insurance defaults in the years ahead as many frail boomers get reverse mortgages;
  • Diversion of cash to fund tax and insurance defaults by lender/issuers;
  • Pressure on the HECM insurance fund and threat to the HECM program’s existence, among others.

Managing tax and insurance default risks and serving seniors’ long-term financial interests require discussion of these issues at the loan interview. To spark the conversation, consider this question:

“Mr. Burns, at FreeFloat Bank, we believe in helping our customers think through critical financial decisions such as taking a reverse mortgage. Sometimes, that means discussing some rather personal situations such as difficulty with basic activities of living daily. May we discuss how your situation could affect your ability to age-in-place, using reverse mortgage funds, both today and in the future?”* 

If Mr. Burns says okay, then proceed; if he says no, hold your peace and document it. The important thing is to make a good-faith effort to address these serious life-stage financial risks that some lenders would rather not be bothered with because they too “invasive.” Responsible reverse mortgage lending is invasive.

Notes:

[1] National Governors Association, “Healthy Aging and States: Making Wellness the Rule, Not the Exception”

[2] Annals of Internal Medicine, August 2007, vol. 147, pages 156-164. “Geriatric Conditions and Disability: The Health and Retirement Study”

*Please give me your feedback on the strengths and weaknesses of this question as well as your suggestions for improvement. You may post your comments or send me an email: atare@thinkreverse.com. Thanks, Atare

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