reverse mortgage, HECM, FHA
Are Reverse Mortgages in the Mainstream?
March 24, 2003, Revised December 2, 2006, December 2, 2008, January 25, 2010, January 13, 2012

“I read a lot about reverse mortgages and how they are becoming part of the financial mainstream. Is this true, and if so, why?”

Reverse mortgages are picking up some steam, but they have a long way to go.

A reverse mortgage is a loan to an elderly homeowner on which the borrower’s debt rises over time, but which need not be repaid until the borrower dies, sells the house, or moves out permanently.

The “forward” mortgages that are used to purchase homes build equity – the value of the home less the mortgage balance. Borrowers pay down the balance over time, and by age 62, when they become eligible for a reverse mortgage, loan balances are either paid off or much reduced.

Reverse mortgages, in contrast, consume equity because loan balances rise over time. If there is a balance remaining on a forward mortgage at the time a reverse mortgage is taken out, it is paid off with an advance under the reverse mortgage.

The need for reverse mortgages has always been there. It is plausible to build equity during high-earning years, and consume it after retirement. It is even more plausible when other sources of retirement income aren’t enough to permit homeowners to maintain their lifestyle. It is most plausible when there isn’t enough income to even maintain their house and pay the taxes. Without reverse mortgages, the only way to consume equity is to sell the house and live elsewhere.

Yet reverse mortgages have always been a hard sell. In the 1970s and early 80s, I was personally involved in developing two reverse mortgage programs that offered excellent products. Neither program survived.

The major problem was not a lack of interest. Elderly homeowners with a need for extra money and no inclination to leave their houses to heirs invariably showed great interest. The problem was a lack of follow-through that resulted in transactions.

The decision was one on which it was very easy to procrastinate. Unlike taking a forward mortgage 30 to 40 years earlier, when the family needed a house to live in, there was no comparable pressure to execute a reverse mortgage. They had the house and the children were long gone, so a decision could be deferred indefinitely.

This tendency was strengthened by the fact that the decision involved their largest asset by far, which had emotional value beyond its financial value. Further, they were at a stage of life where they might not be able to recover from a serious mistake.

Caution and concern were heightened by stories about people like themselves who took out reverse mortgages and were later forced out of their homes. Several depository institutions offered deals to seniors that provided monthly loan advances over a set period, but did not guarantee lifetime occupancy. The deal was that the senior could remain in the house only so long as its value exceeded the accumulated debt. Since the debt tended to grow faster than the property value, eventually, if they lived long enough, they would be forced out of their homes.

The landscape began to change in 1988 with the development of a Federal program under the FHA called the Home Equity Conversion Mortgage (HECM). The borrower protections built into this program, along with the imprimatur of the Federal Government, paved the way toward increasing acceptance by elderly homeowners. The AARP also entered the picture as a major information source (see www.aarp.org/revmort).

HECMs accounted for about 95% of all reverse mortgages being written when this article when first written in 2003. Other reverse mortgage programs were available from Fannie Mae, and from Financial Freedom Senior Funding Corporation, a subsidiary of Lehman Brothers Bank, FSB. In addition, some limited special purpose programs were available from some states and cities. But by 2010, all private reverse mortgage programs had disappeared. See Impact of the Financial Crisis on Reverse Mortgages.

Under all the programs cited in the paragraph above, borrowers have the right to live in their house until they sell it, die, or move out permanently, regardless of how much their mortgage debt grows. If the debt comes to exceed the value of the property, the FHA or the lender takes the loss. In addition, loans under these programs are without recourse. This means that lenders cannot attach other assets of borrowers or their heirs in the event that the reverse mortgage debt comes to exceed the property value.

The number of new HECM reverse mortgages grew from 157 in 1990 to 6,640 in 2000, to 114,692 in 2009, before declining to 54,822 in 2012.  (years ending September 30). Even the peal level was a drop in the bucket when compared to the size of the potential market. Most seniora who  could use the program advantageously still haven’t gotten the message. Unfortunately, in the 2009 to 2012 period, the message began to cloud up because of a number of negative articles in the media, including some that called reverse mortgages the "next sub-prime". See Reverse Mortgages Are Not the Next Sub-prime. The mainstream still lies ahead.

Seniors interested in a reverse mortgage can learn about the various HECM options for drawing funds, and see how much they can draw under each option from lenders certified by the professor, by clicking HERE.
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