REVERSE MORTGAGES ARE BECOMING POPULAR IN AMERICA, though it is only a small niche in the multi-trillion dollar banking industry. It has, however, begun to attract the interest of banks, mortgage brokers, insurance companies and Wall Street investors who are looking for new profit centers in the wake of the subprime mortgage meltdown. Seniors who might be considering these loans, and U.S. taxpayers who have suffered from the subprime mess, should carefully evaluate how the reverse mortgage market is developing. Reverse mortgages are complex financial transactions that have considerable closing costs, but when used correctly and under the right circumstances, have the potential to greatly enhance the lives of the senior borrowers who obtain them. This article will introduce the reader to the reverse mortgage market, provide information about the growth in reverse mortgages, describe the characteristics of these loans, and outline issues of concern.
The role of the reverse mortgage is to put money in the pockets of seniors by allowing equity depletion during the owners' lifetime. Seniors who are 62 or older and who have paid off their home mortgages (or owe only a small balance) are able to tap into their home equity to generate extra cash. These senior borrowers can take the money as a lump sum, a line of credit, monthly payments, or a combination of a credit line and regular payments. The borrowers, unlike with traditional mortgage or home equity loan, do not need to meet income or credit requirements to qualify, and don't have to repay the loan until they no longer use the home as their principal residence. These mortgages are called "reverse" because of the nature of payments. In this case, the homeowner is not the party who makes payments; the bank makes payments to the homeowner. The loan is not repaid until the property is sold or upon the death of the borrower when repayment is settled through normal probate procedures.
Seniors are living longer, and the recent economic crisis has negatively affected their investment portfolios. Not only has the value of their investments dropped, fixedincome securities are providing low income yields. In addition, in many parts of the country home values have declined. Reverse mortgages can give older Americans greater financial security. Many seniors use the income from these loans to supplement social security, meet unexpected medical expenses, make home improvements, and cover other costs.
ORIGINS AND EVOLUTION OF REVERSE MORTGAGES
As far back as the early 1960s, equity conversion loans were being offered by private financial institutions. These lenders introduced shared appreciation mortgages, reverse annuity mortgages, deferred payment loans, and sale/leaseback offerings that varied greatly and were largely unregulated. During the 1980s, financial institutions attempted to expand the reverse mortgage market to take advantage of increased home equity values among seniors. These early efforts to exploit new business opportunities with seniors did not prosper.
Senior advocates and academia thought there was a place for reverse mortgages as a way to remediate the impact of poverty on elderly homeowners. Congress was lobbied by these advocates to create an equity conversion product that was standardized and would be acceptable to the lending industry. In 1988, Congress authorized a prototype insured by the Federal Housing Administration (FHA), a branch of the U.S. Department of Housing and Urban Development (HUD). This initiative was the genesis of the government's Home Equity Conversion Mortgage (HECM) program.
The HECM is the federally insured reverse mortgage product. A commercial lender makes the HECM loan, and the government's primary role is to insure it. It is insured by the FHA. HECMs account for nearly all reverse mortgages originating in the U.S. today. From very modest beginnings, the HECM program now insures more than 600,000 loans. …