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Reverse mortgages are being promoted on television by Henry Winkler, (The Fonz), the star of “Happy Days” and Fred Thompson, a politician and the Manhattan District Attorney in “Law and Order”. We have all seen their tv commercials.
So What is a Reverse Mortgage?
A reverse mortgage is a home loan for older homeowners that requires no monthly payment.
This type of loan allows borrowers to access the equity they have built in their home now. The mortgage itself is not paid off until the borrowers die, sell or move out of the home.
By far the largest type of reverse mortgage is Home Equity Conversion Mortgage (HECM). The HECM program is Federal Housing Administration’s (FHA) reverse mortgage program that lets you (the borrower) convert a portion of the equity in your home to cash. You do not have to repay the loan until you no longer use the home as your primary residence or you fail to meet the obligation of the mortgage.
In recent years, you see the Fonz and other promoters of reverse mortgages more frequently. However, reverse mortgages have been in existence since the 1960’s. The first known reverse mortgage was written in 1961 to the widow of a high school football coach to help her stay in her home despite the loss of her husband’s income. In the 1970’s, several banks offered reverse mortgages but did not include the protection of FHA insurance.
Reverse mortgages continued to increase in popularity in the 1980’s. In the early 1980’s, the United States Senate Special Committee on Aging issued a report stating the need for a standardized reverse mortgage program. In 1987, Congress passed the FHA insurance bill that would insure reverse mortgages. On February 5, 1988, President Reagan signed the FHA Reverse Mortgage Bill into law. Since that time there have been many discussions concerning reverse mortgages in Congress, including those in 2007 and 2012. As a result of these discussion, changes in the law took place in 2013.
So What is The Benefit of an FHA Insured Reverse Mortgage?
A reverse mortgage requires the lending bank to get their money back when the house is sold. After the principal and interest is paid back to the bank, the borrowers or their heirs are entitled to any additional proceeds from the sale. The FHA insured reverse mortgage ensures you will never owe more than the value of your home. If your home sells for an amount less than what is owed to the bank, the FHA makes up the difference.
The FHA insured reverse mortgage also guarantees the borrowers will be able to access their authorized loan funds, even if the loan balance exceeds the value of the home or if the lender experiences financial difficulty.
Who Oversees the Reverse Mortgage Market?
In 2011, the Consumer Financial Protection Bureau (CFPB) was charged with rulemaking and oversight of the reverse mortgage market. The CFPB will issue regulations, develop improved approaches to engaging consumers to make them better informed and monitor the market and accept complaints regarding unfair, deceptive, or abusive practices. This includes working with the Federal Bureau of Investigation to uncover scams, many of which are perpetrated by relatives, caregivers and financial advisors of the borrower. The CFPB issued a comprehensive report to Congress regarding reverse mortgages in 2012.
This and future articles in this reverse mortgage series will focus on:
Providing an historical perspective. Who qualifies? What are the costs? What can the funds be used for? Are financial counselors available to help? How do you drawdown the funds? What are the types of scams? What are some common reference sources? Should reverse mortgages be part of your financial plan?
Is there other information about a reverse mortgage that will help you determine if one is right for you?
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