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CHICAGO (Reuters) - Prior to 2008, many baby boomers assumed they were set for retirement. They would fund those golden years by tapping into their homes if they hadn't saved enough in their 401(k) plans.
But home equity no longer looks like a safe Plan B for a fast-growing group of pre-retirees and seniors.
About 3.5 million homeowners are "underwater" on their mortgages, meaning they owe more than their properties are worth, according to a report released last week by the AARP Public Policy Institute. The rate of foreclosures is lower for homeowners under age 50, while the 50+ population experienced a much higher rate of growth in foreclosures from 2007 to 2011.
At the end of last year, 2.92 percent of mortgage loans to 50+ households had been foreclosed - a whopping 873 percent increase from 2007, AARP reported. By contrast, 3.48 percent of loans to younger households had been foreclosed, with a corresponding growth rate of 729 percent.
The study adds to the growing mountain of evidence that the economy has shredded retirement possibilities, especially for low and middle-class households. Lower home values are especially devastating for these demographic groups.
The Federal Reserve Bank reported recently in its triennial Survey of Consume Finances that housing accounted for 51 percent of household wealth for middle-income households, compared with just 19 percent for households in the top ten percent of income.
Foreclosure activity remains high in many parts of the country, according to a report released today by RealtyTrac, an online marketplace for foreclosed properties. The report found that the number of foreclosures rose in 59 percent of the nation's top metro markets.
California accounted for 10 of the top 20 metro foreclosure rates during the first half of the year; Florida accounted for four of the top 20 metro foreclosure rates, and Illinois accounted for two of the top 20. Georgia, Arizona, Nevada and Colorado each had one city in the top 20.
"Even if seniors are only a little underwater, that can be a big problem since they may be at a time when they want to make a move, and can't easily sell," says Andrea Alegria, an industry analyst specializing in real estate at IBISWorld. "They don't have the benefit of time, which would allow them to wait for the property's value to increase."
AARP found that 53 percent of foreclosures among homeowners over age 50 occurred on loans where borrower income was between $50,000 and $124,999; another 32 percent occurred where borrower income was less than $50,000. Last year, the foreclosure rate for Hispanics over age 50 was 3.9 percent and the foreclosure rate for African Americans was 3.5 percent - double the rate of 1.9 percent for whites.
Even if a housing recovery does get underway, older homeowners who are underwater aren't likely to have sufficient time to wait out a full recovery, which likely will take years, if not decades. About half (51 percent) of families headed by a person age 65 to 74 had no money in retirement savings accounts in 2010, according to Federal Reserve data. And among those with savings, half had less than $100,000. Among families headed by a person age 75 and older, 67 percent had no money in retirement savings accounts in 2010.
"Many of these seniors are relying entirely on Social Security," says Debra Whitman, executive vice president for policy at the AARP Policy Institute.
That leaves many older adults with very limited options when mortgage problems surface. "Many will look to family members for housing - we are seeing a lot of multi-generational housing," says Alegria. "Or they'll rent."
Experts advise seniors facing foreclosure to seek counseling - but only from one of the network of free counseling services approved by the U.S. Department of Housing and Urban Development (HUD). A federal task force has been seeking to crack down on scams by fee-based counseling services that promise vulnerable homeowners that they can save their homes and lower their mortgage payments.
"A lot of the fee-based services we think of as scams," says Bruce Dorpalen, executive director of the National Housing Resource Center, a nonprofit organization advocating for housing counseling agencies. "They aren't as well-connected or as effective as the HUD-approved counseling services." HUD's website offers a national directory of free counseling services (link.reuters.com/nam69s), which work with mortgage lenders to try to avoid foreclosure. Housing counselors also can help homeowners organize their finances and understand mortgage options.
The department also offers a 24-hour housing foreclosure hotline (888-995-4673) that can provide foreclosure assistance.
The new Consumer Financial Protection Bureau (CFPB) offers a useful page of advice and resources for consumers at risk of foreclosure on its website, including HUD-approved counseling and free legal services. (here).
(The writer is a Reuters columnist. The opinions expressed are his own. For more from Mark Miller, see link.reuters.com/qyk97s)
Follow us @ReutersMoney or here. Editing by Jilian Mincer and Alden Bentley