As with everything in life, something can be good for some and the same thing can be bad for others. The same is true of reverse mortgages. Over the next several articles, we will take a look at reverse mortgages, the myths, the facts, and whether or not they are “good” or “bad”.
A reverse mortgage is a financial way of turning home equity into cash for the senior homeowner. The name came from the fact that the reverse mortgage is the “reverse” of a traditional mortgage, wherein the bank makes a payment to the homeowner instead of the homeowner making a payment to the bank each month.
Reverse mortgages began, believe it or not, in the 1960s, when we Baby Boomers were still in Junior or Senior High School. The originals were non-regulated, extremely expensive, sometimes deceptive, and, quite possibly, a few were highly immoral, if not illegal. But in reality, the new “reverse mortgage” in general helped out many seniors and served their purpose of making life easier financially for the retired segment of our population.
The first reverse mortgage was made by a Savings and Loan Company out of Portland, Maine. Soon others saw the benefits of making reverse mortgages, benefiting both the seniors and, of course, the lending institutions. Not too much later, more and more banks and savings and loan companies, as well as private investment firms, began participating. In the 1970s, the product continued to grow as more and more seniors saw the need to have additional income; however, the seniors did not have any of the protections that we have today.
In the early 1980s, a government committee saw a need to standardize the reverse mortgage product, as well as to offer some protections to those who were receiving the loans. Other committees in the mid-1980s saw a need for FHA insurance and uniform lending practices for the lenders, further protection for the borrowers. Finally, in 1987, Congress authorized the FHA to insure reverse mortgages. President Reagan signed the bill into law in early 1988. The first FHA insured loan was made in 1989. The HECM (Home Equity Conversion Mortgage), as the FHA insured reverse mortgage product is known, was on its way and is currently the only reverse mortgage available; Fannie Mae dropped their Home Keeper reverse mortgage product a couple of years ago as they failed to be competitive with the FHA HECM loan.
Despite the economic downturn, the issues with forward, traditional mortgages, and the housing market problems, reverse mortgages continue to grow as a HUD (Housing and Urban Development) regulated program, insured by the Federal Housing Agency, providing a safe and effective way of allowing seniors to tap into the equity in their home to make retirement more financially stable and provide more cash for the unseen events that always occur later in life. Don’t forget that in the mid-1930s, the 30 year fixed, government insured loan, with standardized interest rates and underwriting guidelines was initiated. The furor over that was tremendous: “Beware! You will lose your home or go broke if you get one of these new-fangled loans!” Who can blame them? Until then, the best you could get was an interest only, 5 year balloon mortgage that required about 50% down. How would you like one of those today? How many people do you know now would be able to get a loan with those terms? How many seniors on fixed income do you know who cannot qualify for our “new” traditional 30-year loan or a bank equity line of credit?
Read Part Two...
George R Johnson is a Reverse Mortgage Consultant at LeaderOne Financial Corp. George has served Pagosa Springs for 14 years, previously working in the traditional mortgage division with Wells Fargo. He made the transition to Reverse Mortgages in 2009. George can be reached at 970-507-0467 or e-mail at email@example.com