(Story contributed by Lauren Boland, CEO and Broker of Palm Desert Reverse Mortgage and Coachella Valley resident)
Coachella Valley, CA
If you ask most people what they think about reverse mortgages you’ve probably heard things like: It’s a terrible idea! You’re giving your house away! You no longer own your home when you get one! They’re so expensive that only an idiot would get one!
Like any mortgage, a reverse mortgage may or may not be the right lending product for someone. To explain why, it’s important to understand the history of how this loan product was developed and the advancements in regulation and consumer protections over the years.
The very first reverse mortgage was reportedly written by Nelson Haynes in 1961 of Deering Savings & Loan in Portland, Maine, to help the wife of his high school football coach stay in her home after losing her husband. The idea was to use the equity in the home she lived in to give her money and defer interest until her death or after she no longer lived in the home.
Watch Lauren Boland discuss Reverse Mortgages in her video podcast:
Reverse Mortgage History Timeline:
1987: Congress passes an FHA insurance bill called the Home Equity Conversion Mortgage (HECM) Demonstration, a pilot program that insures reverse mortgages. President Reagan signs it into law in 1988.
1989: The first federally insured HECM is issued.
1994: Lenders are required by Congress to disclose total annual loan costs to borrowers at the beginning of the application process. This gives borrowers the opportunity to compare lenders and shop around for the best interest rates and fees.
1997: The National Reverse Mortgage Lenders Association (NRMLA) is founded with a mission to educate consumers about the pros and cons of reverse mortgages, advocate for the highest ethical and professional standards among reverse mortgage lenders, and advise policymakers on reverse mortgage issues.
1998: The U.S. Department of Housing and Urban Development (HUD) Appropriations Act makes the HECM program official. Congress allocates funding for counseling, education, and consumer outreach. Safeguards like full disclosure of fees are mandated to protect borrowers from excessive charges.
2001: HUD teams up with the American Association of Retired Persons (AARP) to create uniform HECM counseling policies and procedures, and test and train approved counselors.
2008: The $417,000 national loan limit is established.
2009: The lending limit increases to $625,000 which is a major milestone for high-value markets.
2010: Inspired by recent product advances making reverse mortgages more attractive, as well as concerns about retirees “running out of money” in their later years, financial researchers at leading universities begin to examine reverse mortgages as a risk management tool. As a result, they and financial advisors start to develop groundbreaking financial planning strategies using reverse mortgages.
2013: HUD rolls out new HECM policies that strengthen consumer protections, including new limits on the amount of funds a borrower can take at closing and in the first year. This is designed to help extend the life of the borrower’s home equity.
2014–2015: HUD implements and clarifies protections for non-borrowing spouses who meet certain criteria, allowing them to remain in the home if the borrowing spouse passes away or no longer resides at the property. As with any mortgage, they must meet their loan obligations including keeping current with property insurance, taxes, homeowners association (HOA) fees, and maintenance.
2015: To help protect potential borrowers and reduce default rates, lenders are required to perform a financial assessment on each application, helping to ensure that borrowers have the means to meet their ongoing loan obligations including paying property taxes, homeowners insurance, HOA fees, maintenance and upkeep, and other home-related expenses.
2017: The loan limit for HECM reverse mortgage loans increases from $625,500 to $636,150 for eligible borrowers. This marks the first increase in the HECM lending limit since 2009, when President Obama signed the American Recovery and Reinvestment Act.
2022: HUD raises the loan limit for HECM loans to nearly $1 million to help catch up with rising home values.
Let’s return to some of the negative things you’ve probably heard about reverse mortgages. One objection is that there is no equity left in the home. Before the 2008 housing crash, some reverse mortgage would be as high as 80% of the loan to value of the home. Combined with an equity crash and unstable loan markets, some heirs indeed had no equity left to cash in on. As a result, national loan limits were established in 2008.
Additionally, in the early 2000s some unscrupulous lenders were taking the younger borrower off the title to qualify for the loan. At the time that seemed like a good idea, but when the older spouse passed away the younger one wasn’t on the loan and banks had to foreclose. This is one of the reasons for the 2014-2015 HUD modifications which ensure this situation won’t happen again.
Another common objection is simply rumor. At no time is a reverse mortgage bank the owner of the home. Just like a forward mortgage in California there is a deed of trust placed as the “security instrument” on the home. If the reverse mortgage borrower wants to sell the home and take the equity that is available, they can. If they want to pay off the loan and go back to a forward mortgage, they can. If they want to pay the entire loan off (or anyone else) they can and with no penalty. The home is always owned by the borrower and the only way the home can be foreclosed on is if there is a default on the taxes, insurance, HOA fees, or if they no longer live in the home. In 2014 HUD issued protections to verify there is lifetime income to pay for taxes, insurance, HOA fees and cost of living based on the zip code of the home.
Some objections are about the cost. Many people don’t know that processing and underwriting a reverse mortgage is much more complex than a forward mortgage. The first and most time-consuming process is the compliance that takes place to make sure the loan is being processed according to professional and legal standards. This is why most reverse mortgages take 45-60 days to complete after the required borrower counseling. Another cost factor is the Upfront Mortgage Insurance Premium that goes directly to HUD.
There are advantages to reverse mortgages compared to a Home Equity Line of Credit (HELOC). First, if you choose an adjustable-rate line of credit the lender can never revoke the credit line regardless of what happens to your home value while you’re in the home. While a HELOC is inexpensive to get, it only lasts 10 years as an interest only payment. A HELOC lender can shut the credit line down with no explanation at any time defeating the purpose of having one. Although private reverse mortgages are less expensive, their interest rates are almost double a HECM. Over time the private loan costs more and only looks attractive as a result of the initial reduced closing costs.
Some people object to reverse mortgages simply because of stigma or shame. Many people view getting a reverse mortgage as some kind of financial failure. It’s almost a mindset akin to bankruptcy. This shame comes from the objections people give, similar to people who strive to “keep up with the Joneses.” Many retirees did everything right to save for their future, anticipating making ends meet with interest from investments, Social Security, or a pension. This didn’t happen for a lot of people. Most retirement portfolios prior to COVID only experienced lower gains than predicted and by the time the big boom from COVID came to the market the sum in the portfolio had been diminished due to lower than expected returns. After COVID we hit record high inflation. As a result, more people than ever are living off of credit cards rather than considering a reverse mortgage due to stigma.
It’s easy to say “don’t pay attention to what others think” but I ask customers a few questions to put the decision to get a reverse mortgage in to perspective. Can you sell your home and downsize? Surprisingly the answer is almost always “no” because they don’t want to. Can your children help you with supplementing your monthly deficits? Most often the answer is a resounding “no.” The last question is when people bring up friends or neighbors who’ve told them reverse mortgages are a terrible idea. Are they going to loan you the money at lower interest rate and collect when you pass away? No surprise that answer is always “no”.
The long of the short is that more people than you think are land rich and cash poor in 2023. Not because they were irresponsible but because things don’t always go the way you planned. Suffering because of what someone else thinks is more foolish than asking for help to determine what makes the most sense for your life and your long-term financial security.
Lauren Boland is CEO and Broker of LBL Mortgage (DBA Palm Desert Reverse Mortgage) an independent mortgage broker. She has 21 years in the lending industry and exclusive knowledge of how the reverse mortgage loan and process work. She and her company are approved with all major Reverse Mortgage lenders in the United States and can be reached at 562-294-4800 or visiting PalmDesertReverse.com
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