Turn back time to 1961. President John F. Kennedy occupies the Oval Office, Cuban forces repel the Bay of Pigs invasion, the cultural landscape trembles as Civil Rights protests sweep the nation, and in a small town in Maine, a widow receives the first reverse mortgage to compensate for the sudden loss of her husband, courtesy of Nelson Haynes from Deering Savings & Loan.
This era of change – from the birth of Medicare to Neil Armstrong’s lunar arrival – also rocked the mortgage industry. In the following timeline, we take a look at the momentous societal transformations that brought the reverse mortgage, also known as the Home Equity Conversion Mortgage (HECM) into being and shaped its modern role in society.
A Pivotal Pilot Program
Americans value homeownership. Since the struggles of the Great Depression, the government has encouraged homeownership through institutions like the Federal Housing Administration (FHA), thus contributing to today’s vast aging population with high home equity. However, as many Americans pooled wealth in their homes, older homeowners increasingly sought to access their home equity. Congress delivered.
Impressing committees, senators, and the American people alike, the reverse mortgage launched in 1987 as the Home Equity Conversion Mortgage Demonstration, further supported by President Ronald Reagan, who granted the Department of Housing and Urban Development (HUD) the authority to insure reverse mortgages through the FHA. Available only with an adjustable rate, these pioneering products set the precedent for the coming years.
With new solutions sometimes come new challenges. In the coming transitional period, the government tackled nuances and controversies on both ends of the reverse mortgage process. By 1994, congress began requiring lenders to alert borrowers of the total annual loan costs at the beginning of the application process, encouraging customers to compare prices and leveling the playing field for lenders as well.
1998 ushered in waves of change for the reverse mortgage process as congress allotted funds for outreach, counseling, and borrower education. By 2001, the AARP and HUD teamed up to train and test approved counselors while simultaneously streamlining counseling procedures for the client. Further refinancing options allowed existing borrowers to only pay the upfront Mortgage Insurance Premium as well as the difference between the new appraised value and the original. Convenience characterized the era.
Modern Mortgages: New Policies, No Problem
Following the efficiency updates of the early 2000s, the industry encountered its largest surge of borrowers in 2008, as the first of the baby boomer generation turned 62. As part of their systematic mission to simplify processes and safeguard borrowers, the government established the SAFE Act, requiring states to standardize their licensing and registering procedures for lenders, and the Housing Economic Recovery Act protected consumers with a limit on origination fees, rules against cross-selling, and counseling guidelines.
By far the greatest change in reverse mortgages during this decade, the introduction of the HECM for Purchase allowed borrowers to buy a new home without needing to pay a monthly mortgage*. Accompanying this vital addition came an increase of the HECM loan limit from $417,000 to $625,500, substantially improving the available equity that one could access. However, to protect the consumer in the long run, HUD also released a new policy that allows borrowers access to only a fraction of their available equity during the first year to prevent rash spending. To further ensure that a borrower will be able to keep up with taxes and insurance, 2015 brought in a Financial Assessment to analyze a borrower’s income and credit to gauge whether or not that borrower would need a mandatory set-aside of their funds in order to cover such obligations as property taxes and insurance. As always, the government prioritized consumer safeguards as part of their improvement plan.
As millions more Americans approach retirement, demand for reverse mortgages will rise and have significant sway on the future of the country’s financial landscape. To learn more about how a reverse mortgage can benefit you, call one of our licensed experts at (800) 401-8114.
*Homeowner is still responsible for taxes, insurance and property maintenance.