Although reverse mortgages are useful financial tools that have helped many people, misconceptions that took hold during their early years seem hard to shake. Looking at the history behind reverse mortgages sheds light on where the stubborn reputation came from. It also shows that now, thanks to increased industry oversight and borrower education, these loans are more secure than ever. Here’s a look at how reverse mortgages got a bad rap and why it persists despite plenty of evidence about their benefits.
A New Type of Loan and Promising Beginnings
The history of reverse mortgages began with the best of intentions. A loan officer at Deering Savings and Loan in Portland, Maine, designed the first reverse mortgage in 1961 to help a widow stay in her home after the loss of her husband’s income.
The loan’s prominence grew in the 1970s when private banks started offering reverse mortgages to their customers. Many people took reverse mortgages during this time and were happy with their outcome. But, because they were new, borrower protections and oversight were also in development. While the loans themselves weren’t flawed, the industry learned through experience what regulations were necessary to ensure borrowers and lenders had the protections they needed.
Filling Oversight Gaps
In 1989, the US Department of Housing and Urban Development (HUD) began offering a reverse mortgage insured by the Federal Housing Authority (FHA), a home equity conversion mortgage (HECM).
The following are some of the early issues that increased oversight under the jurisdiction of HUD has largely corrected.
Borrowers Took All Their Funds at Once
Since 2013, all home equity conversion mortgages have been subject to a HUD rule that mandates a reverse mortgage borrower can only take up to 60% of their available proceeds in the first year*. This rule came about after some reverse mortgage borrowers accessed all their money too soon and then found there was nothing more available to them.
*The full utilization rule states that a borrower can take the greater of 60% of available proceeds or the amount of mandatory obligations plus 10%.
Borrowers Couldn’t Meet Their Loan Obligations
With a reverse mortgage, a borrower is no longer required to make monthly mortgage payments. They are, however, still responsible for paying their property taxes, mortgage insurance, and any other home-related expenses, like HOA dues. The terms of a reverse mortgage also require that the homeowner maintains their property.
If borrowers fail to meet these obligations, they can lose their homes to foreclosure. In the early days of reverse mortgages, determining financial fitness was left to the borrower. Some borrowers who didn’t fully understand their loan requirements, miscalculated their financial stability, or found themselves unexpectedly short on cash also found themselves in danger of losing their homes.
To ensure that borrowers can meet their loan obligations, HUD now requires lenders to conduct a detailed financial assessment of all reverse borrowers before extending a reverse mortgage. Borrowers who don’t pass the assessment can open a Life Expectancy Set Aside (LESA), which acts similarly to an escrow account, holding some available loan proceeds aside to cover a borrower’s mandatory obligations.
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Borrowers Didn’t Understand Their Loan Terms
HUD mandates that all reverse mortgage borrowers undergo a counseling session with a third-party, HUD-approved counselor before they take a reverse mortgage. This is to make certain before borrowers enter a reverse mortgage that they fully understand how their loan works, how interest accrues on the loan, what makes the loan come due, and other loan terms that they agree to.
In the past, understanding the loan was up to the borrower. Loan officers would explain how it worked, but there was no third party to look out for the borrower and make sure they understood what their loan terms meant or their own responsibilities for keeping the loan in good standing.
The Industry Didn’t Have a Standard Bearer
For many years individual lenders chose whether to offer reverse mortgages to borrowers. Without an organization to serve as a voice for the industry, a variety of disjointed sources influenced public opinion. In 1997, the National Reverse Mortgage Lenders Association (NRMLA) was founded to establish professional and ethical standards for reverse mortgage lenders, advise policymakers on issues related to reverse mortgages, and serve as a resource for borrower education.
If Reverse Mortgages Are Safe, Why Do People Still Think They’re a Scam?
Starting as a well-intentioned solution to one woman’s problem, reverse mortgages have evolved over the years to be a safe and effective retirement planning solution for many. Yet, for as many people as they have helped, many others still believe these legitimate financial tools are scams or not in the borrower’s best interest. Anyone considering a reverse mortgage is likely to encounter skepticism from some members of their communities about the validity of their choice. So, what’s behind the disconnect?
Reverse Mortgages Have Been Misused
Over the years, there have been situations in which reverse mortgages were misrepresented or misused to perpetrate fraud on unsuspecting older homeowners. It’s important to make the distinction that these are scams in which a criminal or criminal organization uses a reverse mortgage as a vehicle to get information or money. This is a form of elder abuse. HUD has issued guidelines to help people avoid scams using reverse mortgages. Among them:
- Avoid rushing into a reverse mortgage, especially if someone else is pushing you to do so.
- Always research lenders and make sure you are working with a reputable reverse mortgage lender authorized by HUD to offer HECMs.
- Shop around before settling on a reverse mortgage lender.
- Know that loan officers are not legally allowed to offer other investment products like annuities. If your loan officer does try to sell you anything other than a reverse mortgage, something is wrong.
- Make sure you are present at your loan closing to receive your proceeds.
The Term “Reverse Mortgage” Is Confusing
Presumably, reverse mortgages first got the reverse title as a way of explaining how they functioned differently from conventional, or forward, mortgages. In this light, the name makes sense. To take a conventional mortgage, you take out money to make the purchase and pay it back over the life of the loan. A reverse mortgage works somewhat in reverse since you take money out of a home you already own and pay it back after the loan comes due.
Even if this name helps people understand how a reverse mortgage functions in relation to a conventional mortgage, calling anything “reverse” or “backward” gives it an instant negative association. No one wants to think of their financial decisions as backward. We want to be forward-looking. While it’s hard to prove, the name “reverse mortgage” may be somewhat responsible for sticky negative perception.
More to the Story
While reverse mortgages have helped so many people fund their retirements, misunderstandings, regulatory gaps, and fraudulent uses of reverse mortgages are also part of the history of this financial tool. And these are the types of stories that media outlets pick up and tend to stick in people’s minds. When developing an opinion about an unfamiliar financial product, a tale about an elderly couple who have lost their home is hard to overcome.
While people who have had great experiences with reverse mortgages make less enticing news, the data shows that the vast majority of reverse mortgage borrowers actually do fit that profile.
- A 2010 National Reverse Mortgage Lenders Association survey of 600 seniors with reverse mortgages found that close to 80% reported their satisfaction with their reverse mortgage above six on a scale of 1 to 10, with 10 being the highest. 43% marked their satisfaction at a 10.
- A 2016 survey funded by The MacArthur Foundation of 1,761 households also showed 83% of seniors were satisfied or highly satisfied with their reverse mortgage.
- A 2020 study by the Journal of Gerontology that surveyed 1,088 older adults found that seniors with reverse mortgages had higher housing and life satisfaction rates than seniors without them.
As these and many other surveys and studies have shown, reverse mortgages are legitimate and reliable options for using home equity in retirement planning. While negative perceptions can be difficult to overlook, especially when you’re making a major financial decision, doing thorough research and working with a financial professional can help you make a choice you feel confident about.
Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
