The Retirement Challenge by Martin Neil Baily & Benjamin H. Harris

Author:Martin Neil Baily & Benjamin H. Harris
Language: eng
Format: epub
Publisher: Oxford University Press
Published: 2022-06-15T00:00:00+00:00

The Reverse Mortgage Market over Time

The reverse mortgage market is complex, likely due to heavy regulation and the desire of lenders to meet different consumer preferences. It has changed markedly in the past two decades, reflecting efforts to address its problems and respond to losses during the 2008 financial crisis. Today, the market is shaped by regulations to limit the losses that federal agencies suffer rather than to make it an attractive market to consumers.

Reverse mortgages were initially offered in the early 1960s to help widows keep their homes, and they were written exclusively by local banks and included no federal insurance. In the late 1970s and early 1980s, reverse mortgages began attracting the attention of federal policymakers as a way to enable older homeowners to access their home equity. In the late 1970s, the Administration on Aging funded a study on reverse mortgage pilot programs, and the 1980 White House Conference on Aging issued a report recommending reverse mortgages as a possible strategy to help older Americans convert home equity to income and still remain in their homes.15

Throughout the 1980s, lawmakers proposed legislation to establish a home equity conversion program, but it was not established until 1988, when President Reagan and Congress authorized HECMs as a demonstration project. HECMs remained in that status for a little over a decade, with policymakers periodically raising the total number of loans that HUD could insure. Initially, HUD could insure just 2,500 homes, but the number gradually rose to 50,000 loans. In that period, loans were required to have several features: they had to include counseling for borrowers, and they had to free the borrower from any repayment requirement until death or the sale of the home. In 1999, President Clinton and Congress changed the HECM initiative from a demonstration project to a permanent program, and they raised the maximum number of insured homes to 150,000, maintaining the counseling and non-recourse provisions (the latter of which let borrowers stay in their homes even if the value of the loan exceeds the value of the home).

With the HECM program now permanent, lawmakers and regulators enacted several incremental reforms to increase its scope. Lawmakers, for example, reformed HECM’s total loan limit from a county-specific to a nationwide standard of $417,000 in 2006, boosting it to $625,500 in 2009 and $726,525 in 2019. In addition, they raised the maximum number of HECM loans to 250,000 in 2005 and 275,000 in 2006. In 2009, President Obama and Congress allowed owners of FHA-approved multifamily homes to participate in the HECM Purchase program.

During the housing crash of the late 2000s, lawmakers and regulators changed the program in several ways to make it more appealing to consumers (see Figure 10.3). In 2008, President George W. Bush and Congress allowed HECM loans to offer fixed-rate mortgages on lump-sum distributions, which helped nourish the popularity of fixed-rate products. From 2010 to 2014, the share of fixed rate mortgages rose from 31 to 89 percent, with most of them designated for maximum distribution.16

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