Reversal of fortune revitalizes LTC funding source
For many long-term care operators, shrinking demand is not likely be a problem in the decades ahead. After all, about 10,000 baby boomers turn 65 every day, and the pace is just heating up.
But there can be a big difference between prospects and paying customers. Fewer than half of the new retirees have the financial wherewithal that's needed to cover the basics in older age, according to many analysts. In fact, 60% have less than $100,000 in retirement savings, notes brokerage firm Charles Schwab. In most parts of the country, that won't cover much more than one year in a nursing home.
Meanwhile, pensions are evaporating, and there is mounting pressure on lawmakers to delay and/or reduce Social Security payouts. Small wonder so many operators are wondering where the money will come from.
Ironically, a funding mechanism that had been all but kicked to the curb appears to be making a comeback: reverse mortgages. Consumers took out $15.3 billion in reverse mortgage loans in 2013, according to Inside Mortgage Finance. That's a 20% year-over-year increase. Not bad for an option that was looking like it might be facing extinction a few years ago.
Technically, a reverse mortgage works more like a loan. Homeowners who are age 62 or older can borrow against the equity in their home. They are not required to make repayments until they sell the home or die. In between, they can tap into thousands and thousands of dollars that can be used for nursing home care other senior living services.
With 77 million or so baby boomers about to enter the retirement pipeline, this could mean many more billions of dollars pouring into the sector. This tool poses little risk to providers. But many lenders view them warily, particularly in the wake of the most recent housing-market collapse. In an effort to draw down risk, the FHA now limits the amount a homeowner can borrow as a lump sum to 60% in the first year, up to a maximum cap of $625,500. That still sounds a whole lot better than zero dollars.
To be sure, reverse mortgages are no panacea. But as veteran sailors will tell you, any port is welcome in a storm. Reverse mortgages are poised to free up funds for long-term care services down the road. And from the looks of things, the relief they provide will be both welcome and needed.