HECM History 101

The reverse mortgage is one of the most well-developed loan products in the mortgage industry. From its birth in 1961, the reverse mortgage has been through many developmental milestones to make it the safe financial tool it is today. According to The Reverse Review, the product has seen rapid growth, expansion of additional innovative loan products, improvement of practices, increased consumer awareness, and a redefining of the options available to seniors. Take a moment as we look back at the major turning points and milestones in the history of the reverse mortgage.

In 1961, the reverse mortgage is born. The very first reverse mortgage is written to Nellie Young in Portland, Maine by Nelson Haynes of Deering Savings & Loan. Haynes designs this very unique type of loan to help the widowed wife of his high school football coach to stay in her home after losing her husband.

At a congressional hearing in 1969, the concept of a reverse mortgage intrigues the Senate Committee on Aging. When a UCLA professor named Yung Ping Chen states his support for an “actuarial mortgage plan in the form of a housing annuity” that would allow homeowners to stay in their homes while enjoying their saved home equity, the chairman expresses great interest.

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 (FHA). Heinz also suggests that the idea of home equity conversion should be further explored.

In 1984, 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 that insures 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.

In 1989, the first FHA-insured Home Equity Conversion Mortgage (HECM) is issued 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 up to four units as long as the borrower occupies one unit as their primary residence.

In 1997, HECM reverse mortgage lender participation is at its highest number at 195.

1998 marks the year that the HECM is officially 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. 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 the standard reverse mortgage.

Also that year, AARP conducts another national survey of reverse mortgage borrowers which reveals borrower’s motivation for getting RM to be has changed from “quality of life improvement” to “debt alleviation”.

In addition, the Federal Housing Administration makes two changes:
– They increase Mortgage Insurance Premium from 0.25% to 1.25% per year
– They lower the interest rate floor from 5.5% to 5%, which is the first time in Reverse Mortgage history.

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 Financial Assessment, which will begin to be implemented in 2015. Financial Assessment will require lenders to analyze potential borrowers’ income sources and credit history to determine whether or not borrowers must have a mandatory set-aside of funds from proceeds to cover necessary expenses such as property taxes and homeowners insurance. These steps are expected to yet again protect consumers and reduce 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 2017, Starting October 2, some major changes are coming to the HECM reverse mortgage industry as the government aims to strengthen the long run projections of the program. Mortgagee Letter 2017-12   There are three essential differences which will take effect starting October 2, 2017.

  • First, upfront HECM mortgage insurance premiums will be increased for certain borrowers, but lowered for others, as compared to the current system.
  • Second, the ongoing mortgage insurance premiums will be lowered, bringing down the total compounding rate cost for most borrowers. This could put rates more in line with the rates of traditional mortgages and the rates of home equity lines of credit.
  • Thirdly, principal limit factors will be changed, which impacts the amount of home equity that will be available for homeowners to tap into at various ages under the HECM program.  You can read a summary from Forbes Magazine here

In 2019, FHA issued Mortgagee Letter 18-12, effective for Home Equity Conversion Mortgage (HECM) case numbers, assigned on or after January 1, 2019. These Mortgagee Letters raised the maximum claim amount for FHA-insured HECMs to $726,525,  for Calendar Year 2019.

In its 58 years from its birth in 1961 to present day, the reverse mortgage has developed significantly, and there’s no end in sight. While higher rates can decrease the amount available from a reverse mortgage, home values have continued to climb leading to increased home equity for many homeowners. The reverse mortgage has a bright future of continually improving and getting only better with time.