For many senior homeowners, accessing a portion of the equity that they have built in their homes can be a vital financial resource. Over the years, Home Equity Conversion Mortgages (HECMs), also known as reverse mortgage loans, have helped many seniors seeking another avenue to supplement their retirement income.
The changes to the HECM program show that it has evolved to better protect and fit the needs of borrowers. In this article, we will briefly discuss the history of the HECM reverse mortgage loan in America and some of the changes that have occurred since the inception of the program.
HECM reverse mortgage loans have been helping supplement retiree’s income for 25 years. In 1988, President Reagan signed the act into law authorizing the Federal Housing Administration (FHA) to insure reverse mortgages through the HECM Demonstration1. In October 1989, the first HECM loan closed in Kansas City, Missouri. Since then, the HECM program has changed to meet the growing needs of senior homeowners. The HECM program saw significant increases in loan volume after the turn of the century.2
In 2008, just after the economic crisis had started, lenders were allowed to offer fixed-rate mortgages on lump sum loans. This allowed borrowers to take the maximum loan amount at closing. These borrowers tended to be younger and often had weaker finances than their predecessors.
The major reason these borrowers gave for obtaining a HECM loan was to “pay off an existing mortgage, rather than to increase income for every day expenses, enhance quality of life or plan ahead for emergencies.” In 2012, nearly 10% of HECM borrowers were in default for failure to pay property taxes and homeowners’ insurance, and three of the largest HECM reverse mortgage lenders; Bank of America, Met Life and Wells Fargo exited the reverse mortgage industry.
To create a more financially stable reverse mortgage loan program, the Department of Housing and Urban Development (HUD) recently created several significant reforms. The first measure of action included replacing the HECM Standard and HECM Saver options with a Single HECM product. Among other changes, the new program implemented initial disbursement limits.
Borrowers may access the greater of 60% of the principal limit amount or all mandatory obligations, as defined by the HECM requirements, plus an additional 10% during the first 12 months after loan closing. The combined total of mandatory obligations plus 10% cannot exceed the principal limit amount established at loan closing.
Some of the key eligibility requirements for a HECM loan include the following:
- Borrowers must be at least 62 years old
- Borrower’s either need to own their home outright or have significant equity built up
- Borrower’s must live in the home as their primary residence
- Borrower’s must participate in a HUD-approved counseling session
- The home must be a single family home, a two to four unit home with the owner occupying one unit, a HUD-approved condominium or a manufactured home that meets FHA requirements
In addition, borrowers are required to continue paying property taxes and insurance and maintain the home according to FHA guidelines. For more information about HECM loans call 866-751-6105.