As the hourglass empties

Having just returned from a grocery shopping trip where both my wife and I were surprised at how little $100 buys anymore, we couldn't help but wonder how the older crowd is dealing with higher food prices. This chart from a (free) story in today's Wall Street Journal probably goes a long way in explaining how seniors are coping.

It kind of looks like one of those real estate sales volume or median price charts from a couple years ago shifted forward in time to remove all the bad stuff that has happened in the housing market since 2005.

Hopefully, enough home equity will remain in the years ahead for those blue bars in the chart to keep on climbing because many seniors have no other choice. The image of the hourglass in the report below tells you about everything you really need to know about the plight of many retirees these days.

It may sound hard to believe, but one part of the mortgage market is hot: reverse mortgages. And that's giving older homeowners more options to tap the equity in their homes -- but also opening the door to more confusion and mistakes.

Only a year ago, homeowners interested in reverse mortgages had little to choose from beyond the plain-vanilla, government-backed products that have long dominated the market. Such mortgages essentially allow homeowners at least 62 years old to sell a large chunk of their home equity back to a bank or other lender in exchange for a lump sum, monthly payments or a line of credit.

Now, nearly a dozen large banks and mortgage lenders have launched reverse-mortgage products with lower fees and larger payouts.
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The boom in reverse mortgages helped Ronald Prast, a 74-year-old Phoenix retiree. When he first applied two years ago, he was told by a loan officer that he wasn't a good candidate; government rules would have allowed him to cash out only a small portion of the value of his half-million-dollar home. But last November, when Bank of America Corp. introduced a reverse mortgage that allows homeowners to borrow as much as 65% of a property's value, up to $10 million, Mr. Prast and his wife, Carolann, quickly signed up.

The couple's house, for which they paid $105,000 in 1981, was appraised at $540,000, Mr. Prast says. They used an initial draw of $208,000 to pay off their outstanding mortgage, home-equity loan, one year's property tax and the loan fees, freeing up an extra $21,000 a year formerly used to make mortgage payments for travel and indulgences like paying for a granddaughter's semester in Australia. They also have a credit line worth $75,000 that they are setting aside for medical expenses.

"We were comfortably well off, and we wanted to release some of the funds we had tied up in our home," Mrs. Prast says.

When we last visited the local bank to check on our safe deposit box stash we were told of the booming business of reverse-mortgages - with fees of between two and seven percent, it seems that banks might just survive the current housing downturn.

That is, as long as home prices don't go too low.