Desperate Homeowners

Things are getting tight. For the last several years anytime anyone needed some quick cash all they needed to do was apply for a HELOC. It was easy money. As noted in this post, it appeared as if the value of houses were going to keep rising, so the actual income people needed to live lavishly was irrelevant. Your house was a high paying second income, and you could enjoy it. Well those days are gone. Now people are scrambling, trying to come up with any to make ends meet - forget about living like a rock star anymore. Just worrying about food, gas, a place to live and still having a job to go to is enough for most of us. This article in the Wall Street Journal titled Pinched Consumers Scramble for Cash lays out the methods people are currently using to just get by. Lets take a look -

After a long binge of borrowing, U.S. consumers face a credit crunch and a sagging economy. To sustain their living standards, many Americans are doing what comes naturally: scrambling to raise more cash. We know people are using their credit cards, reverse mortgages, raiding the retirement accounts, but people are also selling life insurance policy and other settlement policies are using a Rex Agreement. Here is the story involving selling the policies -

Sheron Brunner, 63 years old, bought a $250,000 life-insurance policy in 1997, planning to leave the proceeds to her three children. She faithfully made her $113 monthly payments. But after retiring in 2002 from her job running a homelessness-prevention program, her finances unraveled. Health problems forced her to siphon her savings. A monthly Social Security check of about $700, her only source of income, doesn't cover her medical bills and rising everyday expenses. In September, she moved to Wichita, Kan., from San Francisco to cut her cost of living.

It wasn't enough, so this spring she signed what's known as a life-settlement agreement with J.G. Wentworth, a company that buys life-insurance policies and other tough-to-sell assets. The contract transfers ownership of a life-insurance policy to a third party, which then pays future premiums and collects the benefit. Ms. Brunner received about $45,000 for her $250,000 term policy.

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Also flourishing: niche products that quickly unlock the value of a particular asset. Life settlements, once marketed mainly to the wealthy, have grown in popularity as companies target smaller policies, like Ms. Brunner's. A number of companies cater to people who've won personal-injury settlements -- which are often paid over a period of years -- by buying them out up front, typically for a sum much lower than the amount of the payments sold.
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In life-settlement transactions, sellers like Ms. Brunner often receive only about 20% of their policy's face value. People who sell the rights to their legal-settlement payments often forfeit much of those payments' value.

So they are basically paying 20 cents on the dollar. Not a bad investment at all. And people are so desperate they have no choice but to take it. Things are tight for everyone, especially people on fixed incomes which is basically seniors and those with disabilities. But Bernanke and rest of the government know this when they offer to just print more money. And so just what is this REX Agreement -

The so-called REX Agreement, launched last year by REX & Co., a San Francisco real-estate investment company, offers a different strategy. Not technically a loan,it gives homeowners a cash payment, typically about 13% of the home's value. Upon a sale of the home -- or the owners' death -- the company pockets as much as 50% of any change in home value during the time the agreement was in force. To qualify, applicants need not have much equity in their home. The minimum is 25%.

"I needed to do something to get more cash or reduce my expenses or live in a very, very much downsized [home]," [Tom Terrill, 75, of Kenilworth, Ill.] says. In May, he signed a REX Agreement and received about $406,000 in exchange for 50% of any future change in the value of his $3 million home.

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Some financial planners are skeptical of such newfangled products. A home can be a valuable buffer against unexpected expenses, and if owners are "taking future appreciation and selling it and using the money now, what are they going to do in the future?" asks Jon Beyrer, a fee-only financial planner in Solana Beach, Calif. He would look at a transaction like the REX Agreement only "as a last resort," he says.

Mr. Terrill would rather give REX a share of possible future wealth to maintain his current lifestyle rather than downsize. And Mr. Terill is an retired financial-services executive. Financial services is a big pot, and we now that alot of mortgage brokers and realtors were drinking the Great Housing Bubble kool-aid.

REX sounds like a pretty good investment for investors - not necessarily for the people getting the loans. Offering 50% of the change in future value in a falling market sounds like there are alot of catches. I agree with Mr. Beyrer - this sounds like something of a last resort. Don't be surprised if we read articles about people having problems with REX in a few years. ARMs and Option ARMs sounded like great deals just a few years ago and look what happened. Remember if something sounds to good to be true ...