Reverse mortgages are loans similar to standard home loans. The borrower’s financial eligibility and award are based on an actuarial plan using their age and life expectancy and the value of the home as the main deciding factors. The borrower does not pay back the funds during their lifetime unless they choose to do so. The loan becomes due upon the borrower’s death, or if they sell the home, leaving it permanently. The loan can also come due through what are called ‘Maturity Events’. These are stipulations in the contract which state the borrower can lose the home. Maturity events include making changes the title of the home (i.e. adding or subtracting names on the title), failing to pay homeowner’s insurance (HOI) or property taxes, or including the home in a bankruptcy. Reverse mortgages are exclusive to seniors 62 years of age or older and the reverse mortgage must be on the borrower’s primary residence.
Reverse Mortgage History
The very first reverse mortgage was written in 1961 for Nellie Young of Portland, Maine, through Deering Savings & Loan. The institution’s Loan Officer, Nelson Haynes, designed a new, unique type of loan to help the widowed wife of his high school football coach, allowing her to stay in her home after the death of her husband.
The concept of reverse mortgages was first brought into law makers’ awareness in 1969 at a congressional hearing of the Senate Committee on Aging. A UCLA professor named Yung Ping Chen introduced an “actuarial mortgage plan in the form of a housing annuity” that would allow homeowners to stay in their homes while enjoying a portion of the equity they had saved. The Chairman of the committee thought it sounded promising.
During the first congressional hearing concerning reverse mortgages in 1983, the Senate approves a proposal by Senator John Heinz to have reverse mortgages insured by the Federal Housing Administration. Heinz also suggests that the idea of home equity conversion should be further explored.
In 1984, a home loan lender, American Homestead, sets the foundation for government-insured reverse mortgages when it unveils the Century Plan, which is the first mortgage that keeps the loan in place until a borrower permanently leaves the residence.
In 1987, Congress passes an FHA insurance bill called the Home Equity Conversion Mortgage Demonstration, which is a reverse mortgage pilot program insuring reverse mortgages.
In 1988, HUD gains the authority to insure reverse mortgages through the FHA when President Ronald Reagan signs the reverse mortgage bill into law. The reverse mortgage government insured loan is established.
The first FHA-insured Home Equity Conversion Mortgage (HECM) was issued In 1989, to Marjorie Mason of Fairway, Kansas, by the James B. Nutter Company of Kansas City, Missouri.
In 1990, the HECM program has its 1-year anniversary, with HUD reporting to Congress that the program is steadily growing.
In 1994, Congress begins requiring lenders to disclose to borrowers the total annual loan costs at the start of the application process. This allows borrowers the chance to compare lender prices and shop around.
In 1996, the reverse mortgage program is adjusted to allow for loans on residences that have multiple units—up to four. This opens up reverse mortgages for du-, tri-, and four-plex dwellings, as long as the borrower occupies one unit as their primary residence.
By 1997, HECM reverse mortgage lender participation is at its highest number at 195.
1998 marks the year when the HECM loan product is officially made permanent! The HUD Appropriations Act makes the program official while Congress allots funds for counseling, outreach, and consumer education. Safeguards (like full disclosure of fees) are implemented to protect borrowers from unnecessary charges.
In 2000, HUD announces an increase in origination fees to either 2% of the Maximum Claim Amount, or $2000. HUD hopes this change will encourage more lenders to participate in reverse mortgages because of the higher revenue.
In 2001, HUD and the American Association of Retired Persons (AARP) team up to begin testing and training approved counselors. They also begin the establishment of consistent HECM counseling policies and procedures.
In 2004, the FHA implements rules of HECM refinancing. HECM refinancing allows existing HECM borrowers the chance to refinance and pay only the upfront Mortgage Insurance Premium and the difference between the original appraised value and the new appraised value/FHA loan limit.
In 2005, the first HECM refinances are made.
In 2006, the national loan limit of $417,000 is established. Also that year, AARP conducts its first national survey of reverse mortgage borrowers which reveal that the primary motivation for getting a reverse mortgage for borrowers is to plan for emergencies and to improve the quality of life.
In 2008, the first baby boomers turn 62, which results in a surge of loans which exceed past records. The SAFE Act is also established that year, which requires states to implement consistent procedures when licensing and registering HECM loan originators. Also, the Housing Economic Recovery Act puts up a few safeguards for consumers such as a limit on origination fees, rules against cross-selling, and guidelines for counseling independence.
In 2009, The HECM for Purchase is introduced. For the first time in reverse mortgage history, borrowers are allowed to purchase a new home without paying monthly mortgage payments. That year, Congress also increases the HECM loan limit to $625,500; meanwhile borrower proceeds are reduced when the FHA lowers principal limits for HECM’s by 10%.
2010 proves to be a busy year for the reverse mortgage industry. HUD introduces a new reverse mortgage option called the HECM Saver. Characterized by lower upfront Mortgage Insurance Premiums and closing costs, the HECM Saver makes the reverse mortgage more affordable by allowing homeowners to borrow a smaller amount than standard reverse mortgages.
Also that year, AARP conducts another national survey of reverse mortgage borrowers which reveals borrower’s motivation for getting a reverse mortgage has changed from “quality of life improvement” to “debt alleviation”.
addition, the Federal Housing Administration makes two changes:
In 2013, HUD releases new HECM policies that make the product safer, stronger, and less risky for the borrower. These changes include a policy that allows borrowers to tap into only a portion of their equity the first year. They can then tap into the rest of their equity after the first year.
In 2014, HUD began to finalize guidelines for a standardized financial assessment (FA) of all borrowers seeking reverse mortgages. Implementation of the FA began in May 2015. Financial Assessment requires lenders to analyze potential borrowers’ income sources and credit history to determine whether or not borrowers must have a mandatory Life-Expectancy Set-Aside (LESA) written into their agreement.
There are two types of LESA programs: the first is a full LESA, the second, a partial LESA. The full LESA sets funds aside the borrower would have received prior to the LESA implementation and, like the name suggests, sets them aside in an escrow account to pay for property taxes and insurance. These are paid directly by the servicing company so the borrower never has to worry about them. The partial LESA provides for a check to be sent to the borrower semi-annually to pay for both HOI and property taxes. The down side to the borrower in both of these programs is less cash in hand at the time of closing the loan.
These LESA programs are meant to protect both consumers and the FHA insurance fund by reducing the number of borrowers who might fall into default from failing to comply with loan terms like continuing to pay for taxes and insurance.
In January 2017, the FHA raised the limit on on HECM refinances to $636,150 and there are plans to make further refinements later this year of in 2018.
In its 56-year history, reverse mortgage products have developed significantly, and it would seem they are here to stay. Most of the changes have been in response to lender/borrower abuses, but also to improve the product, safeguard the insurance fund, and making it safer for the seniors its intended to serve.
Reverse Mortgage Abuses
Beginning in 1961, reverse mortgages were proprietary. Contracts were designed by the individual lenders providing the money. Wording in the agreements were exclusive to the agencies writing the loans. In the early years, there were many abuses of the loan product by lenders preying on needy borrowers. Banks often wrote in equity clauses which put the bank on the title of the home along with the borrower. This allowed the bank to come in at the borrower’s death and take the home away from its intended heirs—mostly, children of the deceased borrowers.
This practice gave the reverse mortgage product a bad name, and for good reason.
The product is also abused by borrowers. The first way borrowers abuse the program is in taking advantage of a poorly-written requirement regarding residency. Reverse mortgages are supposed to be only for homes that are the primary residence of the borrower. The FHA ruling is the borrower must live in the home a minimum of 6 months and 1 day out of every year to be eligible for the reverse mortgage. However, after the loan is closed, the borrower need only reside in the home for 1 day each year to remain in compliance with the contract. This paves the way for abuses in claiming vacation homes or other dwellings are primary residences when in fact they are not.
The second way borrowers abuse the system is in rental properties. Too many reverse mortgages have been written in the U.S. to effectively police or monitor compliance. There are no Reverse Mortgage Agents going from home to home to ensure the borrower is still living in their homes. Many homeowners take out a reverse mortgage and then rent or otherwise use the home as an income source when this is in direct conflict with reverse mortgage contracts.
Fortunately, FHA-insured reverse mortgages do not allow lenders to come on title any longer. There for there are no shared-equity clauses in FHA-insured loans. This change took effect in 2008 and has greatly improved the value of the loan to borrowers and their heirs.
Another huge improvement was the amendment allowing non-borrowing spouses (NBS) the right to remain in the home for their lifetime once the primary borrow has passed away. This change was made in a two-step transition in 2014. Prior to the changes, NBS spouses were treated like heirs who had to decide whether they would keep the home or sell it. In reverse mortgages, heirs are given an initial 6 months to sell or secure alternate financing for the balance of the reverse mortgage. They can receive up to two 3-month extensions which increase this time period to 1 year.
Older surviving NBS spouses who could not qualify for a standard loan or a new reverse mortgage were forced to sell and move. This resulted in many lawsuits brought to the FHA, who in 2014, first allowed all new reverse mortgages written to include the provision for NBS spouses to remain for life, but not have any further access to unused proceeds, then later to make it retroactive to all loans that involved NBS spouses.
As of the end of 2015, Texas was the only state not to adopt this NBS inclusion and, as a result, reverse mortgages that would involve a NBS cannot be written.
Another lender abuse practiced by a few lenders is not allowing a 6-month time period for heirs to decide whether they want to keep or sell the inherited property. Some lenders are sending out a 30-day notice of foreclosure in an effort to force the hand of the heirs who aren’t then able to sell or secure alternate financing within the 30-day window. The unsavory lender then begins foreclosure proceedings adding fees to the balance owed and/or often getting the home.