Thursday, July 19, 2012

Old Folks, Underwater Mortgages and "Zero" Interest Rates

Retirees hit hard by foreclosures has the story about the deteriorating financial condition of elderly Americans. It says in part:

"“The Great Recession has been brutal for many older Americans,” said Debra Whitman, executive vice president for policy at AARP.

“America’s oldest homeowners have been struggling to maintain their financial security as their incomes are falling, and as mortgage payments, property taxes and health-care costs are increasing.”

The ATM is empty

And tapping home equity is no longer a cash-flow solution for the some 3.5 million older Americans, who are now “underwater” on their homes (they owe more than the house is worth).

About 23% of loans nationwide — borrowers of all ages — were underwater in December. That figure rises to 28% among younger homeowners, those under age 50, versus 16% for borrowers over age 50, the report said.

Still, “While it was expected that older homeowners would have accumulated more home equity than younger people, the fact that 3.5 million borrowers age 50+ have no equity at all is alarming,” the report said. “Research has shown that negative equity is an important predictor of default, even more so than unemployment.”

Meanwhile, for borrowers over age 50, 600,000 loans were in foreclosure and 625,000 were 90 or more days delinquent as of December, the report said. The delinquency rate for borrowers age 50 and over is now 6%, up from about 1% in 2007.  . . .

Bigger Debt Loads

While the AARP report does not pinpoint precisely why older Americans faced this predicament, it cites data that helps explain why so many more people had trouble paying their mortgage bill.

For one, older Americans greatly increased their mortgage-debt load in the two decades preceding the housing-market crash, with the 75+ age group notching the greatest increase in mortgage debt over the past 20 years.

While financial planners often advise people to pay off their mortgage before they retire, fully 24% of households headed by a 75-year-old or older person had mortgage debt in 2010, up from 6% in 1989, according to the AARP report, which cited the Federal Reserve’s Survey of Consumer Finances.

Mortgage debt also increased among other 50+ Americans: 54% of families headed by a 55- to 64-year-old had mortgage debt in 2010, up from 37% in 1989. And 41% of families headed by a 65- to 74-year-old owed money on a mortgage, up from 22% two decades earlier.

“This increase partly reflects increased borrowing that was spurred by historically low interest rates and high home values prior to the housing market collapse,” the report said. “It may indicate that the oldest borrowers have tapped their home equity to finance their needs in retirement.”"

My Take

It appears that lots of people, including the elderly, got caught up in the "can't lose" mortgage and home equity bubble. Sadly, of course, that bubble has now burst, leaving a trail of tears in its wake.

Add in the virtually zero CD and money market interest rates, and it's tough for retirees. Real tough.

Hopefully, as a society we'll now recognize the evils of excessive debt, including the highly leveraged home mortgages and equity "cash outs" associated with home equity loans.

That game is definitely over. Cleaning up the mess will take a very long time.

But it will be done.

Thanks. Bob.

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