The population may be aging but in terms of foreclosures there are no golden years for a growing number of older Americans.
What’s surprising is that older Americans would seem to have the most defenses against economic turmoil. Those aged 50 and above have had three, four and even five decades to establish careers, pay-off mortgages and set aside funds for retirement. Many now benefit from Social Security and Medicare.
And yet something has gone terribly wrong. Huge numbers of older people who should have made it financially are now struggling.
A new study from AARP, the Nightmare on Main Street, says “the foreclosure rate on prime loans of the 50+ population increased to 2.3 percent in 2011, 23 times higher than the rate of 0.1 percent in 2007. The foreclosure rate on subprime loans of the 50+ population increased from 2.3 percent in 2007 to 12.9 percent in 2011, a nearly six-fold increase over the five-year period.”
How could this happen?
One problem is that Social Security does not provide a gilded life style. The average Social Security income in 2009 was just $13,836 for individuals and $22,512 for couples according to the Pension Rights Center. Since these are “average” figures it means 50 percent of all recipients get less.
A second problem is that money stashed away for retirement has less value. Imagine the thrifty household that socked away $1 million. At 5 percent such a nest egg would yield $50,000 a year but today the money might be safely invested in 1-year CDs that pay about .75 percent. That means “rich” retirees with a million dollars in the bank are getting about $625 per month.
What’s troubling is that foreclosures and short sales among senior citizens are certain to increase.
AARP says from 2007 to 2011 that more than 1.5 million older Americans lost their homes but more foreclosures lie ahead. As of December 600,000 loans to seniors were in foreclosure and another 625,000 were at least 90 days late.
Is there a way out for seniors? Those with equity may be able to sell, short sales are a growing possibility, FHA-insured reverse mortgages could be an option and those with jobs and a good payment history may be able to get a HARP loan modification.
Equity sharing could be another solution. Equity-sharing is a specialized arrangement where there is a non-occupant investor and an occupant co-owner. The investor buys a portion of the property and the senior then pays rent for the share of the property owned by the investor. The attraction for the investor is that a tenant is in place, management costs are nil and investor tax benefits apply. The downside is that with an ownership change financing will have to be re-done, but an investor with cash or a strong credit position can make the refinancing problem go away.
Equity sharing is not limited to arms-length investors. When equity sharing was originally developed the idea was to provide investor tax benefits for parents helping their children buy real estate. Perhaps now, with many seniors fighting off foreclosure, we’ll see more adult children investing in parental residences.
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