Who Created Reverse Mortgages in the US?

Shelley Giordano, Founder Academy for Home Equity in Financial Planning, University of Illinois 

Some people have heard that a reverse mortgage is a scheme or even a scam perpetrated on helpless seniors. Others may consider a reverse mortgage a welfare handout. Many are surprised to learn that the 100th United States Congress initiated the modern reverse mortgage with the 1987 Housing and Community Development Act, and that it was signed by President Ronald Reagan in February 1988. 

By this Act, Congress tasked the Department of Housing and Urban Development (HUD) with designing a reverse mortgage that protected older homeowners but at the same time encouraged private lenders to provide reverse mortgages to seniors. This was tricky because a reverse mortgage requires that the lender wait to be repaid. Regulations require that no monthly payments on principal and interest are due until the last homeowner leaves the home permanently. To try this out HUD published a notice asking potential lenders to participate in a demonstration program that “will insure up to 2,500 reverse mortgages on the homes of elderly homeowners, enabling them to turn their equity into cash.” Under the HECM Insurance Demonstration, the modern reverse mortgage for homeowners 62 or older was born. 

For three decades American homeowners have been able to borrow their hard-earned home equity safely without the need to make monthly payments. So why the lingering distrust of reverse mortgages? 

Few people realize that the HECM reverse mortgage (Home Equity Conversion Mortgage) is insured through the insurance arm of HUD, FHA. Because of this insurance feature, we easily can dispel the dated misconceptions still attached to reverse mortgages. 

Misconception #1. The bank “gets the house.”
A reverse mortgage is just a mortgage like any other. The homeowner does not trade away control of title to his home. He may leave the house to his heirs just like any other house with a mortgage. How the mortgage is repaid is up to the homeowner or his estate. There is no transfer of title to the lender as part of the loan. Heirs may elect to pay off the mortgage and keep the house, just like any other mortgage. 

Misconception #2. The homeowner leaves a debt to his children.
Some people are afraid that the reverse mortgage debt will fall on their children. The reverse mortgage, however, specifically forbids collecting any payment beyond what the house sells for. If there is “profit” left over, the lender does not share it with the heirs. It belongs to them. 

Misconception #3. When the mortgage money is used up, the homeowner must move.
Because the modern reverse mortgage is insured by FHA, no matter how long the homeowner lives in the home as the principal residence it is his house to enjoy. Like any other mortgage, the homeowner must maintain taxes, insurance and home upkeep. 

Misconception #4. There is a trick to reverse mortgages.
The modern reverse mortgage requires that the homeowner have the benefit of independent counseling before undertaking a reverse mortgage. The homeowner is advised that interest is charged on loan proceeds and that taxes and insurance must be kept current. No monthly payment can ever be demanded by the lender. 

Mutual of Omaha Mortgage, NMLS ID 1025894, provides a full range of mortgage products such as VA loan, FHA loans, purchase loans, reverse mortgage loans and reverse mortgage purchase loans. Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees to qualify for a reverse mortgage. This ad is not from, and has not been approved by HUD, FHA, or any government agency. Contact Steve Hawkins, steve.hawkins@mutualofomaha.com with questions.