Robert M. Slutsky Associates

Elder Law Newsletter

Newsletter18: December 2007

The new year is approaching, the snow is here. Happy holidays and read on . . . . .

An Analysis of Reverse Mortgages

Most people want to stay at home as long as possible, but few can afford the high cost of home care for very long. One solution is to tap into the equity built up in your home.

If you own a home and are at least 62 years old, you may be able to quickly get money to pay for long‑term care (or anything else) by taking out a reverse mortgage. Reverse mortgages, financial arrangements designed specifically for older homeowners, are a way of borrowing that transforms the equity in a home into liquid cash without having to either move or make regular loan repayments. They permit house‑rich but cash‑poor elders to use their housing equity to, for example, pay for home care while they remain in the home, or for nursing home care later on. The loans do not have to be repaid until the last surviving borrower dies, sells the home or permanently moves out.

In a reverse mortgage, the homeowner receives a sum of money from the lender, usually a bank, based largely on the value of the house, the age of the borrower, and current interest rates. For example, a 70‑year‑old borrower with a $200,000 house in Westchester County, New York, would be able to receive a maximum loan of $108,584 (based on 2007 figures; see chart below). The lower the interest rate and the older the borrower, the more that can be borrowed.

Homeowners can get the money in one of three ways (or in any combination of the three): in a lump sum, as a line of credit that can be drawn on at the borrower's option, or in a series of regular payments, called a "reverse annuity mortgage". The most popular choice is the line of credit because it allows a borrower to decide when he or she needs the money and how much. Moreover, no interest is charged on the untapped balance of the loan.

Although it is often assumed that an elderly person would want to use the funds from a reverse mortgage loan for health care, there are no restrictions‑‑the funds can be used in any way. For instance, the loan could be used to pay back taxes, for house repairs, or to retrofit a home to make it handicapped‑accessible.

Borrowers who take out a reverse mortgage still own their home. What is owed to the lender ‑‑ and usually paid by the borrower's estate ‑‑ is the money ultimately received over the course of the loan, plus interest. In addition, the repayment amount cannot exceed the value of the borrower's home at the time the loan is repaid. All borrowers must be at least 62 years of age to qualify for most reverse mortgages. In addition, a reverse mortgage cannot be taken out if there is prior debt against the home. Thus, either the old mortgage must be paid off before taking out a reverse mortgage or some of the proceeds from the reverse mortgage used to retire the old debt.

Reverse mortgages are somewhat underutilized now ‑‑ only an estimated 60,000 to 75,000 of the loans have been made. But financial institutions, sensing an opportunity as the population ages and people live longer lives, are expanding their reverse mortgage programs.

The most widely available reverse mortgage product ‑‑ and the source of the largest cash advances ‑‑ is the Home Equity Conversion Mortgage (HECM), the only reverse mortgage program insured by the Federal Housing Administration (FHA). However, the FHA sets a ceiling on the amount that can be borrowed against a single‑family house, which is determined on a county‑by‑county basis. High‑end borrowers must look to the proprietary reverse mortgage market, which imposes no loan limits.

While reverse mortgages look like no‑lose propositions on the surface, they also have some significant downsides. First, the closing costs for these loans are about double those for conventional mortgages. Closing costs on a reverse mortgage for a $200,000 home would be more than $10,000. These costs can be financed by the loan itself, but that reduces the money available to you.

Reverse mortgage payments also may affect your eligibility for government benefits, including Medicaid. Generally, these payments will not be counted as income as long as they are spent within the same month that they are received. If the funds are not spent, however, they could accumulate and push your resources over the allowable limits for Medicaid or SSI eligibility. In addition, payments from reverse annuity mortgages may be counted as income for purposes of Medicaid and SSI whether or not they are spent within the month they are received. This shouldn't be treated as income, since it simply involves withdrawing equity from one's home, but the state may view it differently since the funds come in a regular monthly check. In any case, you should consult with an elder lawyer in your state if you have any concern about how a reverse mortgage will affect your eligibility for federal benefits.

Also, bear in mind that if your major objective is to safeguard an inheritance for your children, a reverse mortgage may not be a good idea. As soon as the elderly person (or the survivor of an elderly couple) dies, it will be necessary to sell the home and much ‑‑ if not all ‑‑ of the sales proceeds will have to be paid to the lender. But if you have a pressing need for additional income and have no close heirs, or if you do not intend to benefit your children or your children don't particularly want to inherit the house, a reverse mortgage can be a way to supplement income, perhaps without jeopardizing Medicaid eligibility.

For more details, background information, and supplementary materials, visit the National Center for Home Equity Conversion's site at www.reverse.org

New Report Ranks State Programs and Highlights Disparities in Services and Eligibility:

WASHINGTON, D.C. - State Medicaid programs have severe deficiencies and suffer from a great disparity of coverage and eligibility from state to state, according to report released today by Public Citizen. The report concludes that the federal Medicaid program, which provides health care coverage to 55 million mostly low‑income Americans, is failing to deliver adequate services to millions of people because of differing state eligibility requirements, benefits and performance.

The report, "Unsettling Scores," ranks the state‑operated Medicaid programs and points out where each state is performing well or lagging with respect to the rest of the nation and accepted benchmarks for care. The report is available here, as is an online database that allows users to compare states for each of the categories studied. The highest‑ranking state earned only 64.6 percent of the maximum points, and 30 states - including a number of large states - ranked in the bottom 10 in at least one category.

"As it enters its fifth decade, the Medicaid program is going through a mid‑life crisis. Federal standards are so inadequate that no state has a truly excellent Medicaid program," said Dr. Sidney Wolfe, director of the Health Research Group at Public Citizen and co‑author of the report. "Our scoring will give states a better idea of how they compare with others and in what areas they need to improve."

The 10 most deficient state programs have overall scores between 317.8 and 379.1 of the possible total of 1,000 points. The worst, in order from 50 to 41, are: Mississippi, Idaho, Texas, Oklahoma, South Dakota, Indiana, South Carolina, Colorado, Alabama and Missouri.

Five of the top‑ranking states are in the Northeast, with three in the Midwest and two in the Northwest. The top 10 states, from 1 to 10, are: Massachusetts, Nebraska, Vermont, Alaska, Wisconsin, Rhode Island, Minnesota, New York, Washington and New Hampshire.

Public Citizen ranked the states on the extent to which they surpass the already low federal mandates and divided the scores into four categories: eligibility, scope of services, quality of care and provider reimbursement. The organization, working with independent Medicaid experts in academia and the private sector, assigned numerical values to score the states' performance in the categories and weights to yield their overall score. The report updates a previous analysis conducted by Public Citizen in 1987, and uses 2004 and 2005 Medicaid data compiled by the Kaiser Family Foundation's Commission on Medicaid and the Uninsured, as well as independent data gathered by Public Citizen, to determine state‑by‑state rankings. This is the only study that has evaluated the overall performance of state Medicaid programs and ranked them accordingly.

The states varied widely in how they determine eligibility. One of the questions posed by the study - "If I were a Medicaid enrollee, where would I be most likely to obtain the best and most comprehensive care?" - can be answered only in terms of the needs and characteristics of the enrollee. For example, a pregnant woman in a family of three must have an income lower than $22,128 a year to be covered in Wyoming, while her Minnesota counterpart would be covered with an income of up to $45,650. Standards of eligibility and service are not consistent or portable across state lines.

"Where you happen to live can make all the difference," said report co‑author Annette Ramirez de Arellano, a public health expert with the Health Research Group at Public Citizen. "Most people on Medicaid face hurdles to eligibility and an uneven patchwork of services because practically all states have deficiencies in one or more of these areas."

To be covered, individuals must meet financial requirements regarding income, assets and expenses, as well as categorical requirements regarding age, family circumstances, employment status, blindness, disability and other factors, all of which can vary from state to state.

States also have different priorities in deciding the scope of services they offer their Medicaid populations. Public Citizen ranked states by the optional health care services that states provide and did not give credit for providing legally mandated services. Even if a state offers a given service, it can limit the population to whom it is offered, as well as the frequency and the duration of coverage. For example, if a patient requires 25 sessions of physical therapy, but Medicaid covers only three, that patient is left without federal help in paying for the rest of his or her required services.

States earned the lowest scores in the category measuring quality of care, perhaps because they have not been required to measure quality in their Medicaid programs. Public Citizen compensated for this lack of information by looking at indicators that suggest quality care is being delivered to Medicaid patients, such as nursing home data about the number of nurses per resident on duty and childhood immunization rates for children.

"Medicaid desperately needs nationwide uniform standards of quality of care and an effective means of monitoring and upholding those standards," said Ramirez de Arellano.

Finally, to determine the ranking for the provider reimbursement category, Public Citizen looked at the fees Medicaid pays compared to the fees paid by Medicare, as well as the amount the program spends per enrollee. States try to keep their Medicaid costs low by paying physicians the lowest possible fees, sometimes paying less than other health care assistance programs for the same services. For instance, Medicaid pays physicians on average only $69 for every $100 that Medicare pays for the same services. This causes some physicians to limit the number of Medicaid patients they will treat and in effect creates a doctor shortage for Medicaid patients in some areas.

Daughters Worried about Mom

Daughters (22%) are almost twice as likely as their mothers (12%) to have $25,000 or more in consumer debt (apart from home mortgages). Mothers, not surprisingly, are concerned about the younger group's ability to adjust to living on a fixed income. Each generation is reportedly worried about being derailed by poor health and rising health care costs.

Conducted for the MetLife Mature Market Institute® by Mathew Greenwald & Associates, in cooperation with the Women's Institute for a Secure Retirement (WISER), the study asked mothers and daughters to assess their own and each other's retirement prospects.

"Today's younger women clearly do not see themselves staying home, caring for the house and relaxing ‑ and their mothers agree," said Sandra Timmermann, Ed.D., director, MetLife Mature Market Institute.

"These findings point the way to lifestyle changes for tomorrow's older women and may influence the growth and direction of the education sector and the travel industry. We'll find more people traveling, taking courses and volunteering. There will also be an increased number of older people in the workplace, unless the younger generations' predictions for themselves are overly ambitious."

"Mothers advise their daughters to save more money and not to 'live beyond your means,'" added Dr. Timmermann.

"Daughters, when asked how they would have advised their mothers, say, 'don't forget your dreams' and be 'willing to spend money if it will make you happy.' It will be interesting to see if daughters, as they approach traditional retirement age and are faced with the financial realities of a long life, are more open to their mothers' advice."

"Unfortunately, younger women may not be responding to their mothers' advice, nor emulating their behavior," said Cindy Hounsell, J.D., president of WISER.

"The older women, whose financial experiences are very much tied to the Great Depression and post‑Depression living, have a conservative outlook toward saving and spending. Daughters report having consumer debt and may not have sufficient pensions and investments to retire with the recommended 80% to 100% of pre‑retirement income. Women heading toward retirement should be reexamining their financial practices."

The study also found the following:

Daughters Will Work Longer¼or Forever - Three quarters of mothers retired before the traditional retirement age of 65, yet only 37% of their daughters predict they will retire before then. 17% of daughters say they will be age 70 or older and 6% say they may never retire. Married women in both age groups are more likely to retire earlier than unmarried women.

Daughters Believe their Retirement will be Better and More Interesting - Two thirds of mothers (65%) believe the quality of their retirement has been excellent or very good, while only 46% of daughters say that about their mothers. More than half of daughters (56%) believe their own retirement will be better than their mothers' and four in ten mothers (41%) agree. Mothers and daughters agree that daughters are more likely to spend their retirement time on active pursuits and less time relaxing and "doing nothing."

Daughters are More Likely to Face Financial Adjustments - More than a third (34%) of daughters say their biggest financial adjustment at retirement will be living on a reduced income or budget, a concern shared by 28% of mothers. More than a quarter of mothers say they did not have to make any financial adjustment when they retired (29%).

Daughters Expect Different Sources of Retirement Income - Nearly nine in ten mothers (90%), but just three in four daughters (75%) report Social Security as a current or future source of retirement income. By contrast, 77% of daughters, compared with 46% of mothers, indicate their retirement will be funded by an employer‑sponsored retirement plan.

Home Equity May Save Daughters - 46% of daughters and 45% of mothers will use their home as a source of retirement income, either through selling the home or tapping into equity. Among those who report that they expect to use their homes as a source of retirement income, daughters (61%) are more likely than mothers (43%) to say they will move to a less expensive home.

Husbands and Wives Play Equal Financial Roles ‑ Nearly half of married women say they share responsibility for retirement planning (daughters, 47%) or managing finances (mothers 43%). Mothers believe their married daughters take more responsibility than they did for retirement planning.

Mothers and Daughters May Not Be Communicating on Retirement - Half of mothers (51%) say they spend some or a great deal of time discussing retirement and/or retirement planning with their daughters.

Unfortunately, daughters may not be listening ‑ Less than one third of daughters report having those conversations with their mothers (32%). Likewise, daughters say they speak with their mothers more often than mothers report speaking with their daughters.

Real Estate and Mortgages

Interest rates for those with excellent credit are where they have been, lower 6s for a 30 year no point fixed rate loan.

People with adjustable rates should still try to refinance into fixed rate products if they can.

Housing is still dropping. New home builders are having a hard time moving their homes and are giving many incentives. Analysts are not really seeing a recovery until late 2008 or in 2009. If you do not have to sell, it is probably better to wait.

In addition to Elder Law, our firm practices real estate law and originates mortgages. Please call us at (610) 940-0650 with any questions or for rate quotes.

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Robert Slutsky, Esq. has been practicing Elder Law for 15 years. He helps families in Montgomery, Delaware, Philadelphia, Chester and Bucks Counties. Mr. Slutsky has represented local Area Agencies on Aging, long term care facilities and was a member and officer on the CAPS Board of Directors for over 10 years. Home visits are available. You may reach him at (610) 940-0650, robslutsky@comcast.net or the website at www.slutskyelderlaw.com.

DISCLAIMER: The content of this Newsletter is for general information only. It is not intended to be legal, tax, financial, medical or other advice. The reader should obtain legal, tax, medical or other advice from a competent professional to address his or her specific needs. We do not endorse any particular service provider. If a service provider is mentioned in an article it is simply because we may have come across them in our travels and cannot speak to their quality of service or integrity.