The origins and history of reverse mortgages reveals a loan product that has evolved dramatically over the last 40 years. The first reverse mortgage loan was written in 1961 by Nelson Haynes of Deering Savings & Loan (Portland, Maine) to Nellie Young, the widow of his high school football coach helping her to stay in her home despite the loss of her husband’s income.
The need for reverse mortgages was further developed in the 1970’s with several private banks offering reverse-mortgage-style loans. These programs gave seniors money from their home but did not afford the protections of today since no FHA insurance had been put in place.
In the early 1980’s the U.S. Senate Special Committee on Aging issued a report stating the need for a standardized reverse mortgage program. Other committees throughout the mid 80’s cited the need for FHA insurance and uniform lending practices. In late 1987 Congress passed the FHA insurance bill that would insure reverse mortgages. This way the reverse mortgage would be under Federal oversight. On February 5, 1988, President Ronald Reagan signed the FHA Reverse Mortgage bill into law. In 1989 the first FHA-insured HECM was made to Marjorie Mason of Fairway, Kansas by the James B Nutter Co.
Since 1989 reverse mortgages have grown in popularity, especially in the mid to late 1990’s. Despite economic upheaval and forward mortgage lending issues, reverse mortgages have continued to grow as a safe, government-insured loan allowing seniors to access a portion of the value of their homes while not having to make a monthly mortgage payment.*
The reverse mortgage has received its fair share of criticism and deservedly so. It was not a good loan for a loan time. It had too many grey areas and loopholes. However, several major improvements have been made to the FHA HECM reverse mortgage that many people aren’t aware of so I will highlight a few.
For funded loans starting in 2015, non-borrowing spouses on HECM’s can stay in the property if their older spouse passes away. If a 75-year-old has a 58 -year-old spouse, since the minimum age for a reverse mortgage borrower for an FHA HECM reverse mortgage is 62, the younger spouse wasn’t able to go on the loan and if the older spouse passes away, or no longer lives in the home as their primary residence, the younger spouse had to sell the home or refinance the reverse mortgage into a conventional loan. This was not fair. Now, as long as the lender knows of the younger spouse at the time of application, if something happens, they can stay in the home for the rest of their lives as long as they keep the home as their primary residence. However, if there are reverse mortgage funds available on a line of credit loan, those funds are frozen. For older loans on the books prior to 2015, the old rules apply. To take advantage of the new rules, the older loans need to be refinanced to get the new protections, however if there’s not enough equity to qualify for the refinance, they must stay with their existing loan.
It’s important to mention that non-FHA HECM reverse mortgages may not extend this courtesy to younger spouses (less than 55 years of age). The home would have to be sold or the reverse mortgage be paid off.
Another positive change is financial assessment. The reverse mortgage was getting negative press due to isolated foreclosures on seniors due to delinquent property taxes. To remedy this situation, each reverse mortgage as of 2015 must have their property tax, homeowner insurance payment history reviewed. If an installment shows as being paid willingly late, the lender may run an algorithm on the youngest borrower’s life expectancy and roll that number of years of property taxes and or homeowner’s insurance into the loan amount. When the tax or insurance comes due, the loan servicer will take funds from the reverse and pay to ensure the property taxes stay current. People may not realize that property taxes are the senior lien in the land and if the county forecloses, the county keeps all the equity, and the lender can lose their entire balance. As you can imaging the lenders get very concerned when they find out their borrowers are falling behind on property taxes. Financial assessment changes this dynamic and decreased these isolated foreclosure instances.
On HECM reverse mortgages with the line of credit feature, in 2013 a full advance of the entire loan amount on the line of credit loan option at closing is no longer allowed. This way the homeowner doesn’t use up all the money right away. 60% of the approved reverse mortgage credit line amount may be taken at closing with the balance being accessible the following year. Greater than 60% can be granted when paying off existing mortgages, but other than that there is a limit on what you take out of the line of credit during the first 12 months. On fixed rate loan reverse mortgages, you can take the full amount, however the loan amount granted is less than the line of credit loan option.
On non-FHA HECM reverse mortgages there is no 60% limit, a full advance can be taken. This loan type has different rules than a HECM reverse mortgage and need to be explained thoroughly. We will make you a unique video for you that will explain it all.
These three changes have been positive to the reverse mortgage. Older reverse mortgage articles on the internet and videos on YouTube highlight the older rules and pundits don’t bother to ask reverse mortgage professionals for any rule or guideline updates making the information passed on to their readers or viewers incorrect or dated. We will still hear about lingering issues on the older reverse mortgages done prior to 2015, but just know newer loans going forward are more user friendly and safer to use.
Best
KW
* Borrowers must continue to pay property taxes, homeowner’s insurance and other property obligations complying with HUD’s requirements for the loan. Failure to do so may result in foreclosure.