March 24, 2003, Revised December 2, 2006, December 2, 2008, January 25,
2010, January 13, 2012
“I read a lot about reverse mortgages and how they are becoming part of
the financial mainstream. Is this true, and if so, why?”
Reverse mortgages are picking up some steam, but they have a long way to
A reverse mortgage is a loan to an elderly homeowner on which the
borrower’s debt rises over time, but which need not be repaid until the
borrower dies, sells the house, or moves out permanently.
The “forward” mortgages that are used to purchase homes build equity –
the value of the home less the mortgage balance. Borrowers pay down the
balance over time, and by age 62, when they become eligible for a
reverse mortgage, loan balances are either paid off or much reduced.
Reverse mortgages, in contrast, consume equity because loan balances
rise over time. If there is a balance remaining on a forward mortgage at
the time a reverse mortgage is taken out, it is paid off with an advance
under the reverse mortgage.
The need for reverse mortgages has always been there. It is plausible to
build equity during high-earning years, and consume it after retirement.
It is even more plausible when other sources of retirement income aren’t
enough to permit homeowners to maintain their lifestyle. It is most
plausible when there isn’t enough income to even maintain their house
and pay the taxes. Without reverse mortgages, the only way to consume
equity is to sell the house and live elsewhere.
Yet reverse mortgages have always been a hard sell. In the 1970s and
early 80s, I was personally involved in developing two reverse mortgage
programs that offered excellent products. Neither program survived.
The major problem was not a lack of interest. Elderly homeowners with a
need for extra money and no inclination to leave their houses to heirs
invariably showed great interest. The problem was a lack of
follow-through that resulted in transactions.
The decision was one on which it was very easy to procrastinate. Unlike
taking a forward mortgage 30 to 40 years earlier, when the family needed
a house to live in, there was no comparable pressure to execute a
reverse mortgage. They had the house and the children were long gone, so
a decision could be deferred indefinitely.
This tendency was strengthened by the fact that the decision involved
their largest asset by far, which had emotional value beyond its
financial value. Further, they were at a stage of life where they might
not be able to recover from a serious mistake.
Caution and concern were heightened by stories about people like
themselves who took out reverse mortgages and were later forced out of
their homes. Several depository institutions offered deals to seniors
that provided monthly loan advances over a set period, but did not
guarantee lifetime occupancy. The deal was that the senior could remain
in the house only so long as its value exceeded the accumulated debt.
Since the debt tended to grow faster than the property value,
eventually, if they lived long enough, they would be forced out of their
The landscape began to change in 1988 with the development of a Federal
program under the FHA called the Home Equity Conversion Mortgage (HECM).
The borrower protections built into this program, along with the
imprimatur of the Federal Government, paved the way toward increasing
acceptance by elderly homeowners. The AARP also entered the picture as a
major information source (see
HECMs accounted for about 95% of all reverse mortgages being written
when this article when first written in 2003. Other reverse mortgage programs
were available from Fannie Mae,
and from Financial Freedom Senior Funding Corporation, a subsidiary of
Lehman Brothers Bank, FSB. In addition, some limited special purpose
programs were available from some states and cities. But by 2010, all
private reverse mortgage programs had disappeared. See
Impact of the Financial Crisis on Reverse Mortgages.
Under all the programs cited in the paragraph above, borrowers have the
right to live in their house until they sell it, die, or move out
permanently, regardless of how much their mortgage debt grows. If the
debt comes to exceed the value of the property, the FHA or the lender
takes the loss. In addition, loans under these programs are without
recourse. This means that lenders cannot attach other assets of
borrowers or their heirs in the event that the reverse mortgage debt
comes to exceed the property value.
The number of new HECM reverse mortgages grew from
157 in 1990 to 6,640 in 2000, to 114,692 in 2009, before declining to
54,822 in 2012. (years ending September 30). Even the peal level
was a drop in the bucket when compared to the size of the potential
seniora who could use the program advantageously still haven’t gotten the message.
Unfortunately, in the 2009 to 2012 period, the message began to cloud up because
of a number of negative articles in the media, including some that
called reverse mortgages the "next sub-prime". See
Reverse Mortgages Are Not the Next Sub-prime. The mainstream still lies ahead.
Seniors interested in a reverse mortgage can learn
about the various HECM options for drawing funds, and see how much they
can draw under each option from lenders certified by the professor, by