Double Whammy for Senior Mortgages: Falling Prices, Rising Debt

Seniors are grappling with the economic crisis in their own way. They must deal with the potential for higher healthcare costs and lower net worth at a time when housing values are sliding and large senior mortgage balances are limiting their options for retirement planning.

On the television game show Press Your Luck, contestants amassed cash and prizes by spinning on the Big Board and avoiding the Whammy. The gamble was an exciting one, mainly because the contestants had nothing to lose but what they'd earned on the show. In real life, though, going against the Whammy has much harsher consequences-particularly for seniors.

Senior mortgage defaults

Seniors may have a rough go of things in the years ahead. A September report from AARP concluded that 28 percent of all delinquent mortgages in the second half of 2007 were held by borrowers aged 50 and older. That equates to 684,000 senior homeowners, many of whom were living in California, Colorado, Florida, Nevada, and Michigan. Presumably, some of these seniors have already lost their homes to foreclosure.

Additional data from Golden Gateway Financial corroborates a deteriorating financial condition among seniors. The firm collects anonymous information through its online reverse mortgage calculator, and makes this data available to the public on a quarterly basis. The third quarter numbers show an increase in the average age of homeowners pursuing reverse mortgages. Further, the percentage of these homeowners who have existing mortgage debt is going up, too.  

Golden Gateway's data also shows declining home values among these older, mortgage-strapped homeowners.  Seniors reported an average home value of $428,786, which is down 4.5 percent from the level reported in the first quarter.

Retirement planning puzzle

Foreclosed and debt-strapped seniors who are seeking a reverse mortgage have two things in common: they both lack cash, and they both lack home equity. Since most retirement planning strategies require one or the other, these elders may have no choice but to go back to the workforce just to get by. The problem is particularly severe for those who've watched their fixed investment income dry up as interest rates continue their historic decline.

Should home values recover significantly in the short-term, cash-poor seniors could either borrow against their equity, or sell the home and downsize. But when 65 percent or more of the home is already financed, neither of these options offers much benefit. Consider the homeowner who owes $175,000 on a home worth $250,000. She could sell and try to find a new place to live for $75,000. Or she could fund a reverse mortgage. According to AARP's reverse mortgage calculator, this scenario would net only about $90,000 prior to fees, but after paying off the first mortgage debt.

In short, the real life Whammy of insolvency is lurking out there for many seniors. This is just another reason to hope that housing values recover and our economy finds a quick way out of this mess.