Long-Term Care Report Advocates Hybrid Reverse Mortgage Option for Seniors

People are living longer, which is a good thing. Regarding retirement needs, however, this means it is as crucial as ever that people stay on top of saving and planning for their personal and financial needs when they hit retirement age. Long-term care, while not the most exciting thing to anticipate, must be carefully planned for as well. Those who cannot fund their own long-term care most likely fall back on Medicaid, which is unsustainable in the long term.

A Citizens League report from Minnesota, published last week and titled Moving Beyond Medicaid: Long-Term Care for the Elderly as a Life Quality and Fiscal Imperative, included a year-long, in-depth collaborative effort and study of long-term care financing challenges by a group of experts called the Long-Term Care Collaborative.

Citing the fact that two-thirds of Minnesotans aged 42-60 are concerned about their ability to pay for long-term care and a growing state Medicaid crisis looming, the report strongly advocates a “cost-effective hybrid reverse mortgage product” for seniors.

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This option would resemble the standard reverse mortgage that is offered currently, but would be altered a bit. Stipulations include: loans would be available to anyone drawing Social Security; funds would be made available as a line of credit for specific purposes like long-term care; rates for low-income households may be subsidized; fees should total no more than 3-5 percent of the line of credit; the loan should be excluded as an asset for determining Medicaid eligibility; and the loans could be administered either through the private market or the state.

The report cites a high demand and market for this kind of product in the U.S., with 13 million people being qualified candidates for reverse mortgages and 7 million people over 65 and with incomes under $30,000 owning their homes outright. The volume of reverse mortgages also doubled nationwide between 2005 and 2008.

Replacing Medicaid’s home exemption with this hybrid reverse mortgage option could save Medicaid up to $20 billion per year in the U.S., the report said.

A Looming Crisis

The state of Minnesota is close to approaching a Medicaid crisis. Medicaid currently funds 40 percent of long-term care costs for the elderly in the state, and this statistic will grow rapidly if action is not taken.

“Medicaid funding for long-term care for the elderly could grow nearly fivefold in Minnesota by 2050, from $1.1 billion in 2010 to $5 billion in 2035,” the report said. Unless taxpayers agree to foot the bill for this – which is highly unlikely – other forms of financing need to be put into place. And Minnesotans seem to be on board; 86 percent think government should prioritize developing new and better options for personal funding of long-term care.

The LTC Collaborative suggests Medicaid be used as a co-insurance system that works with a person’s privately purchased insurance or savings and depends on a person’s income. Under this system, the collaborative hopes to restructure Medicaid to serve mainly the impoverished (as it was originally designed to do) and emphasize reward for personal responsibility and savings.

Other recommendations include prize-rewarded savings, a lottery-type system where savers can be entered into drawings for cash and prizes; a broader mix of insurance products; and a better offering of unbiased financial information and education for citizens.

For the full report, click here.

Written by Clare Pierson

Update: A previous version of the article stated that the number of reverse mortgages doubled in the state between 2005 and 2008, it has been updated to reflect that reverse mortgages doubled nationwide between 2005 and 2008.

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  • These reports are normally filled with strange ideas. Most of the time, the authors do not want to incur the cost of having their reports reviewed. This report appears no different.

    Here is what the authors believe about the risk and administrative costs of reverse mortgages: “A simple way to reduce the risk and administrative costs would be to reduce the amount of equity that can be withdrawn, so that the ultimate home value (due to market forces or a lack of home maintenance) is of less risk. We recommend that a home equity product be designed along the lines shown in the box on page 14.” While some of that is true, how does it reduce the administrative costs?

    This is what is stated in the box on Page 14:

    1. Loans are available to anyone drawing Social Security.
    2. Funds are made available as a line of credit for specified purposes related to long-term care.
    3. Rates for low income households may be subsidized.
    4. Fees should total no more than 3-5% of the line of credit.
    5. The loan should be excluded as an asset for determining Medicaid eligibility. (However, as noted above, proceeds from conventional re-verse mortgages and housing assets should perhaps not be excluded.)
    6. The loans can be administered either through the private market or the State.

    Why is drawing Social Security a qualification? Who will subsidize the rates and why? If fees are as low as they want them to be, who can afford to originate these reverse mortgages unless those costs are also subsidized? Is the state actually prepared to administer a reverse mortgage?

    Number 5 makes no sense whatsoever. Since a loan is a debt to the borrower, how can be it counted as an asset? If one is going to count the unused line of credit as an asset, then that amount must also be added to the balance due as a contingent amount. It is obvious no one with an accounting or serious financial background was consulted when putting this document together.

    Since Minnesota has less than 5.4 million people per the 2010 census, how does the following paragraph from the summary above even make sense? “The report cites a high demand and market for this kind of product in Minnesota, with 13 million people being qualified candidates for reverse mortgages and 7 million people over 65 and with incomes under $30,000 owning their homes outright. The volume of reverse mortgages also doubled between 2005 and 2008 in the state.” I think the summary author is citing the report but the 13 million and 7 million are old statistics cited by the report authors and refer to older national statistics.

  • Let’s hope other states and our industry itself start taking this business model very seriously.

    There is a staggering long term care crisis out there looming for our seniors of this nation and the reverse mortgage, used correctly and in the right set of circumstances, can play a huge role in solving this crisis for millions of seniors.

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