Thursday, September 17, 2009

Pulling your LEGS

OK, I've been reading about toxic mortgages and credit default swaps and things like that. So, here's a new idea for "Life Estate Generated Securities" or LEGS: just in time for baby-boomer senior citizens.

In case you didn't know about them, "life estates" are ways for older citizens to qualify for Medicaid or other subsidized programs by giving away their homes to -- as is most usual -- their children. The point is that Medicaid has an income and asset limit to qualify, with a 5-year lookback. So, by giving away their homes at least 5 years before they might want to use such a program, this enormous asset doesn't count against them. (There are probate advantages as well.) However, many seniors are fearful that their "dear relatives" may eventually throw them out of the homes which are no longer theirs, or give control of the home to a golddigging future partner. So life estates have the provision that the donor retains the right to live in the house (now owned by the donees) for as long as he or she wishes to (or is alive), with the provision that the donor remains responsible for taxes and upkeep. Let's call this the Right.

Now the interesting thing is that this Right to live in the house is actually worth something, and is legally transferable. The worth is determined by formulas based on statistical estimates of the donor's life span (remember, the Right only persists for as long as the donor is alive). Thus, the donor could sell the Right on the open market, which would give the buyer the Right to live in the house (even though it is owned by the donees) for as long as the donor is alive. The face or base value of the Right is determined, as I said, by government longevity statistics; however, the value the market places on it could vary considerably, depending on cost of housing and the average age of the donors. Of course, there is always the risk that the donor could die shortly after the sale of the Right, rendering it worthless.

So here's a thought. Some enterprising entrepreneur or investment group or bank could buy up many of these Rights from seniors who no longer need them since they are about to enter assisted-living or nursing homes. They then bundle the Rights into security-like packages and make a market in them. Initially they would be discounted based on the statistical likelihood that certain of the Rights would become worthless due to the demise of the donors. These are the Life Estate Generated Securities or LEGS mentioned above.

Who would buy such securities? People interested in short term (several years) housing, or people interested in providing such housing for others -- say for senior-citizen tourists (beats RVs, after all), the homeless, or visiting academics etc.

Now we apply the subtle ideas from the recent past: create insurance policies on these LEGS. After all, you don't want to be caught with a bagful of LEGS whose donors die too soon. Then you create a market for these policies themselves...

As a calculus teacher, I always loved derivatives.

Somehow this reminds me of the Yiddish saying: "If the rich could pay people to die for them, the poor could make a good living."

(Anyone know the actual Yiddish for this?)

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