When the Great Recession swept across the United States, retirement plans were put on hold for millions of hard-working Americans.
The downturn officially lasted from December 2007 to June 2009, making the 19-month economic skid the longest such morass in U.S. history. But the official dates, which are designated by the U.S. National Bureau of Economic Research, do not tell the whole picture. Most people understand that a downturn is not fenced in by historians. Many markets, including the housing market, were in turmoil long before December 2007 and many remained in dire straits until long after June 2009.
The financial crunch came in many forms. Many lost their jobs. The value of enormous retirement funds was decimated. And the value of real estate, the principal investment for most Americans, began to crash.
Housing did not begin a meaningful recovery until 2012, long after the official ending of the Great Recession. It was tied, of course, to the strength of jobs and the ability of banks to return to lending in significant numbers.
Those who want to move to a Sun Belt town and live on a fixed income for retirement were stuck with homes that did not have the value they were counting on.
Yet, there was a surprise option for retirement that suddenly became popular, which was the magical-sounding reverse mortgage that few Americans had previously used when thinking of retirement.
As you would expect, the recovery found itself shackled or hobbled by complementary parts of the equation. The job market could not expand until businesses could borrow to finance expansion and none of that was about to happen while the banks remained in recovery mode. Of course, there were very few businesses or residents who wanted loans in the first place, because nobody expected the eight million or so Americans who had lost their jobs to be in the mood to make purchases, while they were digging themselves out of debt incurred before the recession, especially if they had yet to find jobs that paid as well as they had when they were spending freely.
But reverse mortgages bucked the trend. Homeowners across the country who were thinking of retirement realized a lot of their equity was tied up in their homes. While the housing market was in a slump, however, banks could offer a reprieve in a reverse mortgage that ignored the basic market dynamics. It meant, as magical as it sounds, that homeowners could retire and keep their home at the same time. And all through the relatively simple act of securing a reverse mortgage.
Sadly, at the peak of the recession, many homeowners simply walked away from their mortgages, because it wasn’t worth making high payments on something that had falling value. That meant taking a hit on their credit records rather than keeping up with payments
Nothing was quite so visually useful to explain how real estate was tied to retirement than the image of a home mortgage being “underwater.”
Underwater refers to a home in which the value of the home has dropped so far that what is owed on the home mortgage is worth more than the home itself. Such a predicament was known as being “underwater.” And this is where many property owners found themselves wondering if they should sell their homes or investment properties.
Say you bought a home for $150,000 just before the market crashed. By the middle of the recession, the value of that home had gone down to $100,000. Meanwhile, you still owed $140,000 to the bank. That means, your mortgage was very much underwater.
All this added up to a major surprise to both lenders and borrowers and to both civilians and financial experts, which was that the long-trusted formula of holding on to your home to fund a major portion of your retirement was suddenly challenged.
But one way or another, the American Dream still links much of its high hopes and high standards to real estate.
Let’s say you have that same home valued at $100,000 and you are close to retirement. You might, at that point, own 90 percent of that home, while the bank (or other lender) owns 10 percent.
That means you have $90,000 tied up in your home. While you bemoan your fate waiting for a home buyer, many banks will allow you a sensible way out, which is to orchestrate a reverse mortgage. That would be a loan based on the point that you are worth $90,000, even though you can’t access that until your house is sold.
If you want to stay in your home during retirement, so much the better. Reverse mortgages are not designed particularly for people who are about to sell and move — although there that is an option open to the homeowner. That means, you can stay where you are, which is what many folks near retirement dream of doing, anyway.
Reverse mortgages are often described as the single financial lending arrangement that actually is as good as it sounds. It’s a “too good to be true” option that isn’t overstated. The recession may have forced that decision on some homeowners, but most of them were very glad that it did.