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HECM Reverse Mortgage

The HECM Reverse Mortgage – Understanding the Past and Potential    

Seniors today face a good problem; they are not only living longer, but are living more active lives as a result of better nutrition and significant advancements in medical science.  The pressing challenge for seniors has become how to fund this extended longevity. (1) What’s more, this gets more complex when taking into consideration the 76 million baby boomers (aged 52 to 70) in or nearing retirement that are carrying not only more debt, but higher amounts of debt than previous generations. (2)   For many older adults, most of their nest egg is held in their home equity.   And tapping into this equity is not exactly easy as it requires selling your home. (3)   In reviewing different options, one that shows a lot of promise and has gained in popularity since the 2000’s is, the Home Equity Conversion Mortgage (HECM).  A HECM is a federally insured reverse mortgage program for senior borrowers 62 and older, created to help seniors tap into their home equity without having to sell their property and still retain 100% ownership.

History of the HECM Reverse Mortgage

 

The HECM Reverse Mortgage was not born overnight and has evolved slowly to become the tool it is today.  In looking at retirement from a historical perspective, there are some important milestones that include the enactment of Social Security in 1935 and Medicare in 1965.  The first reverse mortgage was issued in 1961 by a savings and loan company; however it was in a very early stage of development. (4) During this time, the concept of the reverse mortgage as a viable retirement tool persisted in the minds of academics and governmental officials alike.   In 1975, as explained in a paper by Jack Guttentag of the Wharton School:  “The reverse mortgage is badly needed; it is also very different from, and more complex than any existing financial instrument.  It constitutes a challenge of the first magnitude to the imagination of the government, and to the ingenuity and adaptability of the private financial system.”  (5)

 

From the period of 1961 to 1988, the HECM Reverse Mortgage underwent a technological development process from actuarial modeling to the establishment of core elements with a framework along similar lines as other public risk pooling programs such as Medicare. (6)  By 1984, “Reverse mortgages have been so long in coming that many people hear about them even before they are available in their areas… American Homestead said the company receives 200 to 300 letters a day.”(7)  In 1987, Congress runs a pilot program called the HECM Demonstration, lasting 10+ years, and annually capping a limited number of reverse mortgage loans allowed to be issued.   Finally in 1989, the federal government signs into law the authorization of the FHA to insure HECM reverse mortgages, making it a permanent program. (8)  In the 2000’s, the HECM starts to “take off,” fueled by historically low interest rates and appreciating property values.  There is a peak period in 2009 and in the years that follow, the number of reverse mortgage decreases due to the Great Recession marked by the housing bubble burst in 2008.  However, the HECM bounces back and consumer demand for reverse mortgages resumes again in an upward trend from 2012 as the housing market recovers. (9)

Taking a look back, the HECM was created as a retirement option with the underlying assumption of a strong home owning society.  Dating back to the 1930’s, the government took an active role in encouraging home ownership as part of the American Dream.  In fact, globally we rank among the highest in terms of homeownership rates. It is in home equity where a large number of seniors have accumulated real wealth. (10)   Considering the potency of this real wealth, Robert Merton, a professor of Economics at MIT and Nobel Prize Laureate expresses “reverse mortgages are a powerful, yet largely untapped tool for retirees to improve their standard of living.” (11)

 

As previously mentioned, this tool became more robust and practical over time.  Below are notable timeline events that describe the evolution of the HECM.

 

1989:   The HECM becomes insured through the Department of Housing and Urban Development (HUD). This mortgage insurance is necessary for acceptance by private lenders as it makes these mortgages a viable and safe loan to offer to consumers.   In other words, if the reverse mortgage loan value becomes higher than the property value, or the property becomes “upside down” due to property value depreciating, the federal government is responsible for the difference. In turn, the consumer benefits as they receive better terms from the lenders and a guarantee of timely proceed payments should the lender have financial difficulties or go bankrupt.  (12)

 

2001:  HUD and AARP unite to implement mandatory nationwide counseling policies and procedures, including the training and testing of approved counselors. (13)

 

2004:  The HECM Refinance is created to allow existing HECM borrowers refinancing opportunities to take advantage of lower interest rates and increasing property values.  (14)

 

2006 and 2007:  Private investors and Ginnie Mae enter the secondary market to supply HECM loans, creating competition with Fannie Mae, the sole investor up until 2006.   In addition, FHA starts using the one-month Libor index, significantly encouraging more interest and focus in the HECM as it’s a preferred index in the investor community.   The influx of all the new investments incites a push for competitive interest rates, better products and lower costs for the consumer. (15,16)

 

2008:  The SAFE Act is passed mandating states to establish consistency in the licensing and registering of HECM loan originators.  Moreover, the Housing Recovery Act implements origination fee limits, rules against financial “cross-selling,” and standards for ensuring independence with consumer reverse mortgage counseling. (17)

 

2009:  The HECM for Purchase product is created, allowing the senior borrower to obtain a reverse mortgage and purchase a new home in one single transaction.  This option is great for seniors who prefer to move into a home better suited to their aging needs.  In addition, limitations are made to the HECM loan limit in the amount of $625,500 and the lowering of principal limits by 10 percent, as a consequence of the housing bubble burst in 2008, when HUD’s insurance fund went into a negative balance.  These changes only further ensure the sustainability and safeness of the HECM Reverse Mortgage Program for the long haul.  (18,19)

 

2010:   To make the HECM more affordable, lower closing cost options are introduced which are geared towards homeowners who borrow smaller amounts.   And in continuation, to keeping the product sustainable with longevity in mind, mortgage insurance premiums increase from 0.25% to 1.25% per year and the interest rate floor is decreased from 5.5% to 5%.  (20)

 

2013 to 2015:   The ripple effects from the Great Recession were significant with homeowners falling behind on their taxes and insurance payments, causing a rate of increase of defaults by half from 2010 to 2014.  (21) Consequently, HUD released a series of new policies to help ensure the safeness, financial soundness and long term sustainability of the HECM Reverse Mortgage that included 1) limitations to the amount of proceeds a borrower can withdraw in the first year 2) the addition of the Financial Assessment to ensure borrowers can afford to stay in their home by showing their ability to pay property taxes and insurance. (22)  3) added protection for the non-borrowing spouse to be allowed to continue living in the home, as long as property taxes and insurance are maintained and the home remains the primary residence.  (23) With these changes in place, a study by the Center for Retirement Research at Boston College predicts a default reduction on reverse mortgages by 50%.  (24)

 

For the past 55 years, the HECM Reverse Mortgage has come a long way to becoming the practical and financially sound tool for seniors; whether it is for the purpose of improving quality of life in retirement, emergency planning, or debt alleviation.   The latter will likely predominate as the reason given the large baby boomer generation in or headed to retirement.  (25)  The architects of the HECM reverse mortgage were visionary and created a tool relevant for today.  If this tool is used as intended for the management of funds, slowly over time, this could help ensure a good retirement for working and middle class families.   The future for the HECM is bright in its potential to serve for the greater good!  (26)

 

Sources:

(1) Huebscher, Robert. “Robert Merton on the Promise of Reverse Mortgages and Peril of Target-Date Funds” Advisor Perspective. November 2 2015:  pp. 1–5.

(2), (25) “Pressing Challenges in Housing Finance:  Credit Access and Seniors’ Mortgage Debt”.  US Department of Housing and Urban Development. Spring 2016:  pp. 3-11

(3), (12), (16) “A Turning Point in the History of HUD’s Home Equity Conversion Mortgage Program” US Department of Housing and Urban Development. Spring 2008:  pp. 5-11

(4) Seattle Times Staff. “A Brief History of Retirement:  It’s a Modern Idea” The Seattle Times. December 31, 2013:  pp. 2-4

(5) “The History of the HECM – A Detailed Timeline of the Product’s Evolution” The Reverse Review. October 2012:  p.40

(6), (10) “History of Reverse Mortgages” Reverse Mortgage Alert. Pp. 1-7

(7) “The History of the HECM – A Detailed Timeline of the Product’s Evolution” The Reverse Review. October 2012:  p.41

(8), (13), (14), (15), (17), (18), (20) “The History of the HECM – A Detailed Timeline of the Product’s Evolution” The Reverse Review. October 2012:  pp. 40-45

(9), (21), (23) Rosato, Donna. “Reforms Come to Reverse Mortgages” Consumer Reports. April 4, 2016 pp: 1-10

(11) Huebscher, Robert. “Robert Merton on the Promise of Reverse Mortgages and Peril of Target-Date Funds” Advisor Perspective. November 2 2015:  p. 1

(19),(22), (24), (26) Lane, Ben. “Study:  Recent Changes to Reverse Mortgage Rules Cut Default Risk in Half” July 15, 2016 pp: 2-3

 

 

 

One response to “HECM Reverse Mortgage”

  1. Reverse mortgages are increasing in popularity with seniors who have equity in their homes and want to supplement their income.

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