History of Reverse Mortgages

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History of Reverse Mortgages

The reverse mortgage industry is anything from dull. This kind of loan was developed in 1961 at a small neighborhood bank in Portland, Maine, allowing senior residents to access their home equity while still living there and owning the property. Government support for this kind of loan was given in the 1980s, and changes have been made to it ever since as new problems and demands arise.

These significant turning points helped reverse mortgages become what they are today.

Key Takeaways

  • Nelson Haynes, who was seeking for a means to enable the widow of his high school football coach remain in her house when her husband passed away, is said to have created the first reverse mortgage in 1961.
  • Haynes’ invention attracted a lot of attention, but it would take several years for the concept to become a workable, widely used product.
  • The first home equity conversion mortgage (HECM), which was introduced in 1989, was made possible by political support for a plan to introduce reverse mortgages insured by the Federal Housing Administration (FHA) in the 1980s.
  • Continuous improvements have been made to reverse mortgages in an effort to make them more secure, competitive, and profitable.

1961: First Reverse Mortgage Helps a Widow Keep Her Home

The widow of a football coach supposedly received the first reverse mortgage in 1961. Legend has it that Nelson Haynes, a bank employee at Deering Savings & Loan in Portland, Maine, was trying to find a way to assist the widow of his high school football coach remain in her house after her husband passed away. The reverse mortgage was his original solution. Haynes’ innovation began to get notice and support from individuals like Jack Guttentag of the Wharton School, Yung-Ping Chen of UCLA, and Ken Scholen, who worked with the Wisconsin Board on Aging and authored three books on the issue. A solution that allows senior homeowners to access their equity and maintain their houses hit a nerve. Private banks started providing their own reverse mortgages in the next ten years.

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Some claim that reverse mortgages date back to the 1980s. The first item of this kind, however, was really released several decades earlier.

1980s: Reverse Mortgages Get Government Backing

The 1980s saw the next significant advancement. A proposal by then-Sen. John Heinz, R-Pa., to have reverse mortgages insured by the Federal Housing Administration was adopted by the Senate at the beginning of that decade (FHA).

With the support of Congress, a pilot program to provide government-insured reverse mortgages—now known as home equity conversion mortgages, or HECMs—was launched in 1987 after some early reluctance from the U.S. Department of Housing and Urban Development (HUD). The contemporary reverse mortgage was created when then-President Ronald Reagan signed the Housing and Community Development Act into law in 1988.

1989

The year when the first FHA-insured HECM was issued

1990s: The HECM Program Becomes Permanent

To increase openness and enable borrowers to more easily compare costs and shop about, Congress mandated lenders to publish entire yearly loan expenses at the beginning of the application process in 1994. The HECM program was then made permanent by the HUD Appropriations Act four years later. A reform in 1996 permitted homes with up to four units to qualify for a reverse mortgage as long as the borrower resides in one of those units as their permanent residence, as well as the introduction of Fannie Mae’s own reverse mortgage, dubbed the Home Keeper (now terminated).

2000s: Soaring Demand and the Great Recession

When it became clear that an increasing number of borrowers were having trouble making their property tax and insurance payments around the turn of the 2000, HUD raised origination costs to entice additional lenders into the market and collaborated with AARP to strengthen counseling procedures. Additionally, the refinancing of existing HECMs was permitted, and a single national loan ceiling was created to take the place of several county lending restrictions.

Reverse mortgages were becoming more and more well-liked as a realistic financial option for older homeowners. But since the HECM didn’t serve everyone’s needs, jumbo reverse mortgages and proprietary reverse mortgages—alternative private-backed loans with larger payouts—became available. These loans were created expressly for persons who didn’t fulfill HUD’s lending requirements.

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Then came the Great Recession. Proprietary reverse mortgages temporarily vanished after 2008, although the more popular HECMs saw a significant increase in demand and were subject to stricter regulations. Cross-selling was not permitted, origination costs were restricted, and counselors had to meet certain standards and maintain their independence from lenders. Other modifications included the introduction of the HECM for Purchase program, which enables borrowers to purchase a property without making regular mortgage payments, and the transfer of HECM insurance from the General Insurance Fund to the Mutual Mortgage Insurance Fund (MMIF).

2010s: More New Rules, Protections, and Allowances

The beginning of the decade 2010 was hectic. HUD raised mortgage insurance fees (MIPs), dropped the interest rate floor from 5.5% to 5%, and limited principle limitations (the amount that may be borrowed) in reaction to an increase in foreclosures. Older homeowners now have the option to borrow a reduced portion of their home’s worth thanks to the 2010 introduction of the HECM Saver. HECM Saver, which promised cheaper upfront MIPs and closing expenses, was terminated in 2013 because it failed to gain any traction with the general public. The Reverse Mortgage Stabilization Act introduced the following significant modifications in 2013. This law made it easier for non-borrowing spouses to continue living in the home after the borrower left, limited the amount that borrowers could access in the first year, introduced the life expectancy set aside (LESA), an escrow account for those whose risk of loan default was higher, and made it necessary for all borrowers to undergo a financial assessment before being approved for a loan, with the last two provisions starting in 2014. The FHA made it simpler for homeowners living in unapproved single-unit condos to qualify for a HECM in the second half of the decade. Principal limits were cut again, MIPs were reduced, the HECM loan limit was increased for the first time in almost 10 years, lenders were required to provide a second property appraisal in cases of possible inflated valuations, and lenders were ordered to provide a second property appraisal.

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2020s: COVID and Inflation

The COVID-19 and inflation have so far been the two primary themes of the 2020s. The Coronavirus Aid, Relief, and Economic Security (CARES) Act gave affected reverse mortgage debtors extra time to organize their affairs and make their debt payments. Shortly after that, rapid inflation in real estate prices caused the HECM national loan maximum to rise from $822,375 to $970,800.

Who started the reverse mortgage?

According to reports, Nelson Haynes of Deering Savings & Loan in Portland, Maine, created the first reverse mortgage particularly to assist the widow of his high school football coach remain in her house when her husband passed away.

When was the first home equity conversion mortgage (HECM) issued?

Reverse mortgage insurance under the Federal Housing Administration (FHA) was granted to the U.S. Department of Housing and Urban Development (HUD) in 1988. The James B. Nutter Co. gave one to Marjorie Mason of Fairway, Kansas, who was the inaugural recipient, in 1989.

How do banks make money from a reverse mortgage?

The interest that accumulates on the loan sum is primarily how lenders get paid. They may also charge an origination fee and be compensated by selling loans to investors on the secondary market.

The Bottom Line

The market for reverse mortgages is always changing. These products have a long history and provide older Americans who are interested in using them a lot to think about since the regulations and qualifying requirements tend to change rather often.

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