Problems before FHA got involved
Most people don’t know that reverse mortgages have been around in different forms since 1961. However, FHA did not begin insuring them until President Regan signed the FHA insurance bill called the Home Equity Conversion Mortgage Demonstration. This was the pilot program that authorized FHA to insure 50 Home Equity Conversion Mortgage (HECM) loans, the first one being in 1989. (Over 1.2 million HECM’s have been originated since).
However, prior to 1988, reverse mortgages were the wild, wild west. There was very little regulation or oversight. Some lenders would do some things that were not in the best interest of the homeowners. Some of these stories made it to the press.
When FHA began insuring reverse mortgages, these problems disappeared, but the stories live on to this day.
Family misunderstandings
Families don’t always agree or get along. Sometimes parents do not feel the need to let the adult children know that they have taken a reverse mortgage out against their home. When this is the case and the last homeowner passes away or has to leave (for example to a nursing home), the family thinks they are inheriting a free and clear home and find out quickly that is not the case.
Unfortunately, there is really no way to resolve this issue except through communication among family members. This type of thing does not happen very often, but enough to give the industry a black eye from time to time.
Two events in 2008
Of course, everyone recalls the “Great Recession” in 2008. But what most people do not recall is it was in 2008 that FHA allowed lenders to offer fixed-rate HECMs on a lump sum basis (meaning the homeowner had to take all the funds in one lump sum at closing. It is also referred to as a “closed-end loan”).
The fixed-rate HECM became very popular, very fast. From 2008 to 2012, about 70% of all HECM loans were fixed-rate. The two reasons why this program became so popular were:
- To a lot of people, adjustable-rate mortgages are bad. They caused a lot of people to lose their homes in recession. They do not understand how they work in the reverse mortgage world.
- Lots of loan officers in the sub-prime mortgage business in the early 2000s saw the writing on the wall that the sub-prime market was going away and they jumped ship. Unfortunately, the ship they jumped to was the reverse mortgage market.
From 1989 until 2008, all HECM loans were adjustable rate loans. With an adjustable rate HECM, homeowners are not required to take all loan proceeds in one lump sum at closing, as they are with the fixed rate HECM.
In 2008, when FHA allowed fixed rates, homeowners and loan officers jumped at the offer.
However, most people did not think it through and the new reverse mortgage loan officers were not much help. They were making a lot more money on these loans than they were at the adjustable rate since the beginning loan balance was much higher because the homeowner was taking it all upfront as one lump sum.
The fact that lots of people were blowing their money and the loan officers were not emphasizing to them the need to ensure the property taxes and homeowners insurance be kept current, along with the fact that a lot of people were losing their jobs and had to retire before they were financially ready, led to about 10% of these loans not keeping current with their taxes and insurance. This led to foreclosures, which led to bad press.
There have been a number of regulatory changes since 2008 to correct these issues including initial disbursement limits, lowering of the principal limit numerous times, advertising requirements that lenders must state the homeowner is responsible to pay their own property taxes and insurance and financial assessment, and more.
Each of these changes is an article in and of itself (maybe more than one), so I urge you to investigate them at your leisure or feel free to call me and I can explain them.
Non-Borrowing Spouse
In the past (prior to August 2014), if a couple wanted to get a reverse mortgage, but only one person was 62 years old or older, the younger homeowner would take her/his name off the title so the older homeowner could get the loan.
This was all well and good unless the older homeowner (who was also the only borrower), died or had to permanently leave the home. When this happened, the loan was called due since the borrower did not occupy the home. The younger spouse either had to sell the home or refinance the loan to pay it off.
This situation caused a lot of problems, (and a lot of bad press).
In 2013 AARP sued HUD to make a change. In 2014 HUD came out with a non-borrowing spouse (NBS), rule. There are a lot of details to this, but in a nutshell, the younger spouse, even if he/she is not on the loan, can stay in the home if the older, borrowing spouse, dies or has to permanently leave the home. The NBS needs to continue to occupy the home as their primary residence, keep his/her name on the title, maintain the home, and keep current on the property taxes and homeowners insurance. But if they can do all this, the loan will not be called due and the NBS can stay in the home without paying off the reverse mortgage.
As you can see, most of the issues that caused the bad press have been corrected for years or even decades, but people still cling to old ideas and in some cases outright falsehoods. Please watch the video I recorded explaining these issues and feel free to contact me with any questions.
If you want more detail on this topic, please listen the podcast of my radio show from August 18, 2022 here.
