February 26, 2014
A reverse mortgage is one on which the loan balance rises over time, with no repayment obligation so long as the borrower resides in the house that secures the mortgage. It is designed for elderly homeowners who have significant equity in their homes but are short of spendable funds, and who feel no need to pass along a debt-free home to their heirs.
The need for an effective reverse mortgage program in the US has never been greater. People reaching retirement age are living longer than ever, but they are retiring with less capacity to maintain their living standards. With good reason, this situation has been termed a “retirement funds crisis.” Many other countries face a similar problem.
A number of private reverse mortgage programs have come and gone in the US. The most recent of the private programs, modeled on the public HECM program described below, fell victim to the financial crisis of 2007-2008. The crisis shut down the private secondary market on which the private reverse mortgage market was dependent for permanent funding.
The program that remains, called the Home Equity Conversion Mortgage or HECM program, provides Federal Government insurance against loss to the investors who hold the mortgages. The program is administered by the Federal Housing Administration (FHA) to which borrowers pay insurance premiums to cover the losses that arise in cases where the debt comes to exceed the property value when the loan is paid off.
The HECM program is cleverly engineered to provide a range of options in the ways that borrowers can draw funds, and it is also highly flexible in permitting borrowers to shift from one option to another. These features, however, make the program dauntingly complex to many seniors.
My colleagues and I have attempted to deal with the complexity in two ways. One is a monograph that identifies many senior needs, ranging from “eliminate payment on existing mortgage” to “purchase a house”, and matches them with the relevant HECM option. It will be found at Which HECM Options Best Meet Your Needs?
Since the needs are more or less universal, those interested in developing reverse mortgage programs in other countries may find this a useful guide to the features they might wish to include in such programs.
In addition, we have developed a reliable and easy-to-use calculator enabling seniors to determine the specific amounts of any particular HECM option, or combination of options, that are available at their current age with their current home equity. See HECM Calculator.
The author is interested in materials pertaining to reverse mortgage programs in other countries -- our intent is to incorporate such materials into this blog. I am also available to answer questions, write to firstname.lastname@example.org