The history of reverse mortgages in America starts with the HECM (Home Equity Conversion Mortgages) as they are known, which were formally established in the late 1980s by the federal government’s Department of Housing and Urban Development (HUD) after lobbying efforts pushed for seniors to be able to cash in on their home without having to sell. As homeownership and the American Dream became one, much of seniors’ wealth was — and still is — tied up in their homes and accessible only after selling those properties. The idea of allowing seniors to tap into equity while still living in and owning their homes created a desirable higher standard of living during retirement.

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 Timeline of the History of Reverse Mortgages in America

1961-1968: Spurred by lobbying efforts of groups focused on aging, the Home Equity Conversion Mortgage (HECM) program undergoes a modeling process similar to other public programs such as Medicare.

1978: Wisconsin awarded federal grant for feasibility study of reverse mortgages. WI Department of Aging used funding to conduct research and provide technical assistance on six pilot projects across the country for lending against home equity for seniors.*

1987: Congress runs a pilot program called the HECM Demonstration, lasting 10+ years and capping the number of reverse mortgage loans issued annually.

1989: Government authorized The Federal Housing Administration (FHA) to insure HECM reverse mortgages through HUD. This made reverse mortgages viable and safe for seniors and available through private lenders. HECMs began being offered with equity payout options that included monthly payments, a line of credit or a one-time lump sum in many states, but not all.* This move meant 2 major things for borrowers:

• If they ended up with a loan amount that exceeded the value of their home (i.e. “upside down”), the government would cover the difference.
• They received better terms from lenders, as well as guaranteed payouts in case the lender had financial trouble or went bankrupt.

1994: Congress begins requiring lenders to share the total annual loan costs (TALC) associated with the loan with their clients. This was the first time consumers were privy to this information and able to use it to shop around for a more competitive offer.

1996: Eligible property type was expanded to include 2-4 unit properties, as long as borrower occupied one unit as their primary residence and Mutual Mortgage Insurance Fund (MMIF) was increased to allow for up to 50,000 HECM loans.*

1998: Legislation mandated full disclosure of all costs required or not, to obtain a HECM loan to protect borrowers from excessive, unnecessary third-party services.

1999: The Appropriations Act allowed for up to 150,000 mortgages a year to be insured. This act also required the Director to expand consumer education, authorized funds for consumer education, expanded disclosure requirements and restricted erroneous charges not required to obtain the loan.* These changes made the program safer for the consumer.

2000: The American Homeownership and Economic Opportunity Act of 2000 made it possible for borrowers to refinance a HECM loan and restricted the amount of the origination fee on a refinance.

2006: FHA starts using the one-month LIBOR (London Interbank Offered Rate) index leading to more competitive rates, products, and lower costs for the consumer.*

2008: The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE) and the Housing and Economic Recovery Act (HERA) of 2008 passes.

SAFE mandated:

– States establish consistency in the licensing
– Registering of all loan originators

HERA:

• Strengthened the counseling requirements for mandatory borrower education
• Put regulations in place to govern the amount that can be charged as an origination fee for all lenders
• Restricted cross selling with other financial or insurance products
• Made it possible for borrowers to use a reverse mortgage to purchase a new home.*

2009: HECM for purchase program was formally introduced in 2009 and was the first year borrowers are able to purchase a new primary residence with no monthly mortgage payments in a single transaction. Due to the housing crisis, interest rates were raised, HECM loan limits were raised to $625,500 while the principal limit decreased by 10 percent, leading to lower borrower loan proceeds.*

2010: Lower closing cost loan options are introduced allowing borrowers access to a smaller amount of equity than other HECM products as mortgage insurance premiums increase from 0.25% to 1.25% annually. Additionally, the interest rate floor was lowered for the first time in history from 5.5% to 5%.*

2013: The Reverse Mortgage Stabilization Act of 2013 made changes that were necessary to improve the fiscal safety and soundness of the program.*  These changes included:

• Adding new Single Disbursement Lump Sum payment option
• Limiting amount of loan proceeds available the first year
• Introduced legislation to require all borrowers to undergo a financial assessment before loan approval, to start in 2015
• Introduced the Life Expectancy Set Aside (LESA) escrow account and required it in situations where risk of loan default was higher
• Removed option of having any payment of an annuity premium paid at loan closing
• Adding protections for non-borrowing spouses (NBS) to continue living in the home after the borrower has left, as long as tax, insurance and residency conditions are met
• Changes were made to some calculations to increase the longevity of the MMIF
• Allowed HUD the ability to use notices or Mortgagee Letters to make any further changes or updates to the program

2014: Many of the mandates included in the 2013 Stabilization Act were implemented in 2014 as rules were laid in place for the financial assessment requirement to be carried out in 2015.

2015: HUD implements Financial Assessment rule that requires borrowers’ credit histories, income sources and ability to pay taxes and insurance be taken into account in approving HECMs. In some cases, borrowers may be required to set up a “life-expectancy set-aside account” (LESA) where a portion of funds that would otherwise be proceeds to the borrower are deposited into an escrow account to ensure all future property charges are paid. This is an additional borrower protection put in place to reduce the amount of defaulted loans due to nonpayment of property taxes and insurance.

2016: The Federal Reserve raised interest rates for the first time since 2009. This change was made to add additional longevity to the reverse mortgage program as property values continue to increase.

2017: Initial Mortgage Insurance Premium (MIP) changed to 2% of the Maximum Claim Amount and the annual MIP rate changed to one-half of one percent of the outstanding mortgage balance. In addition, lending limits were raised for the first time since 2009 to $636,150 to account for rising property values. Congruently, the regulator of LIBOR, publicly questioned the sustainability of LIBOR.  The anticipated withdrawal of banks from the LIBOR panel and the absence of the underlying market supporting LIBOR makes the future of the LIBOR uncertain.*

2018: Under new requirements, FHA will require a second appraisal be conducted in some cases.*

2019: The maximum claim amount for FHA-insured HECMs was raised to $726,525 to account for rising property values. This year, FHA also announced the opportunity for borrowers who reside in non-FHA approved condo units to apply for single unit approval for their respective unit. This rule change allowed borrowers who were otherwise ineligible for HECM loans to become eligible. In addition, various private lenders began offering their own reverse mortgage loans with their own eligibility requirements and qualifications. Interest rates remained low as market conditions fluctuated amid political unrest.

2020: The maximum claim amount(MCA) for FHA-insured HECMs was raised to $765,600 to account for rising property values. Many more proprietary programs were announced in various states across America. With the onset of the COVID pandemic, interest rates continued to be the lowest in history.

2021: The LIBOR was replaced by the Secured Overnight Financing Rate (SOFR) index. This year also saw expanded protections for non-borrowing spouses. In addition to the updates to the HECM program, 2021 saw some big changes in the proprietary reverse mortgage market leading to more competitive and dynamic loan options in many states. The current FHA county lending limit as of January 2021 is $822,375.

More than a million homeowners have enjoyed the tax-free benefits of reverse mortgages since 1990. Continual improvements to the various reverse mortgage programs preserve the long-term sustainability of the programs, make them safer for the consumer, and more dynamic for individual retirement planning. As the history of reverse mortgages in America is ever-changing, we are seeing new products, regulations, and protections put in place often.