As with many lending services, the Home Equity Conversion Mortgage (HECM) industry is heavily regulated for the sake of the consumer. Throughout its brief history, the reverse mortgage has undergone many changes, spawned numerous offshoots of the program, and developed into a new role as an effective retirement tool. To better understand the reverse mortgage process and the development of the HECM, let’s take a closer look at two major governing institutions: the U.S. Department of Housing & Urban Development (HUD) and the Federal Housing Administration (FHA).
The HECM Program
As Americans pooled wealth in their homes, many older homeowners increasingly tried to find ways to access their home equity. In 1961, the first reverse mortgage was given to a widow to help her manage the sudden loss of her husband. From there, the program spread all across the nation. After going through several different versions as private lenders experimented with the limits of this new type of loan, the government sought to keep the program safe for a growing population of senior homeowners.
Congress delivered. Impressing senators, committees, and American citizens alike, the first government-sponsored version of the reverse mortgage (known as the Home Equity Conversion Mortgage Demonstration) was launched in 1987. Once President Ronald Reagan granted HUD the authority to insure these loans through the FHA, the loan enjoyed further support and rapid growth. While it was only available with an adjustable rate at that time, this product paved the way for more modern versions.
Over the years, the modern reverse mortgage has developed into a far more sophisticated program. In order to meet the needs of so many different types of borrowers, the HECM comes in several forms: the adjustable rate HECM, fixed rate HECM, and HECM for Purchase are among the most popular kinds of reverse mortgages on the market today. Thanks to the introduction of so many new regulations, the modern HECM allows you to remain the owner of your home and requires no monthly mortgage payments. Homeowners are still required to pay property taxes, homeowners insurance, and home maintenance costs.
The Purpose of HUD
Beginning with the Department of Housing and Urban Development Act of 1965, HUD took shape as a Cabinet-level agency only a few years after the birth of the reverse mortgage. As an overseer of the FHA, HUD serves to protect borrowers and oversee various housing programs. Acting as the authority on reverse mortgage transactions, HUD sets high standards that lenders must uphold and subsequently enforces these rules on lenders who do not uphold proper standards.
The Role of the FHA
In order to provide peace of mind for borrowers, the HECM is a non-recourse loan thanks to the efforts of the FHA. If a borrower’s loan balance exceeds the value of the home at the time the loan becomes due and payable, the FHA insurance will cover the difference. Effectively, this means that the FHA protects both borrowers and lenders alike. If a lender ever goes out of business, the FHA will step in to provide borrowers with their deserved funds and services while also protecting lenders from downturns in the housing market. By providing this peace of mind, the FHA serves as an invaluable aide to the reverse mortgage industry.
Introducing Financial Assessment
Thanks to government intervention, the reverse mortgage program has become increasingly more secure for seniors of all kinds. Because some seniors with poor credit began to default on their loans in recent years, the government stepped in once again to do what it could to protect these homeowners. Thus, the Financial Assessment procedure was born.
Although there is no strict credit score, HUD’s Financial Assessment procedures require lenders to perform a credit history analysis and residual income/cash flow analysis on all borrowers before approving any kind of HECM. If concerns arise, a Life Expectancy Set Aside (LESA) or partial LESA may be established to help borrowers stay up-to-date on property taxes, homeowners insurance, maintenance expenses, and other costs.
Thanks to the efforts of the federal government, the reverse mortgage has become a far more standardized and secure loan for millions of seniors across the nation. The future looks bright for the industry and borrowers alike.
These advertisements and materials are not provided nor approved by the U.S. Department of Housing and Urban Development (HUD) or the Federal Housing Administration (FHA).