Home equity conversion mortgages (HECM) have evolved since the pilot program launched in the late 1980s. Currently, HECMs are available in all 50 states, and according to the National Reverse Mortgage Lenders Association (NRMLA), the most common type of reverse mortgage.
Home Equity Conversion Mortgage (HECMs) and HUD
The origins of reverse mortgages date back to the 1960s when Nelson Haynes, a banker in Portland, Maine, wanted to offer an option to a widow who still wanted to stay in her home. Haynes recognized that a reverse mortgage could help seniors access their home equity without making monthly mortgage payments. Borrowers would be required to pay property taxes and homeowner’s insurance, maintain the home, and comply with the loan terms. The Senate Committee on Aging became intrigued with this concept, and UCLA professor Yung Ping Chen endorsed the idea of a reverse mortgage. Different pilot programs and research initiatives gained momentum in the 1980s, and various pilot programs were launched nationwide.
In 1988 Congress passed a Federal Housing Act (FHA) bill called the HECM Demonstration, which gave HUD the authority to insure reverse mortgages. Over several decades, HECMs have undergone multiple changes to offer borrowers additional protections and meet the retiree population’s changing needs.
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Improved Consumer Protections
As an FHA-insured mortgage, HUD wants to make these loans safe and affordable for borrowers. Here are ways consumer protections with HECMs have improved over the years.
Financial Assessment
As of April 2015, the U.S. Department of Housing and Urban Development (HUD) has required lenders to conduct a financial assessment for borrowers applying for a HECM. The financial assessment allows lenders to look at a borrower’s financial profile to determine if they can meet the eligibility requirements of the loan.
Life Expectancy Set-Asides
Also, in 2015, the Federal Housing Authority (FHA) implemented a policy for the life expectancy set aside (LESA) program. This program helped increase the chances that HECM borrowers could afford their expenses even when faced with market challenges and economic fluctuations. With the LESA program, borrowers will set aside a predetermined amount in an account to ensure they have enough funds to pay property taxes, and insurance will be paid. Having this set aside could help prevent the borrower from defaulting on the loan terms.
Increased Lending Limits
During the 1980s and 1990s, borrowers could only get a loan for up to $124,500. Since then, the lending limits have changed so that this loan may remain relevant to seniors and adjust according to inflation, interest rates, and other economic factors. In 2008, the government increased the maximum limit to $417,000. In 2024, the maximum lending limit is $1,149,825.
More Protection for Non-Borrowing Spouses
In 2014 and 2021, HUD expanded protections for non-borrowing spouses after the last borrower on the loan passed away. If the HECM is not in default for any reason other than the death of the last borrower and the non-borrowing spouse meets the eligibility requirements, they can stay in the home. Today, non-borrowing spouses enjoy more protections than ever before. Since August 4, 2014, this designation has made it possible for the widow or widower to remain in the home they enjoy.
Adjustments to Principal Limit Factors (PLFs)
The Federal Housing Administration (FHA) has periodically adjusted the principal limit factor (PLF). Generally, based on the borrower’s age, home value, and interest rates, the PLF determines the proceeds a borrower receives. The FHA makes these adjustments to align with economic conditions and actuarial assessments.
Easier Application Processes and Funding
Starting in the mid-2000s, borrowers can apply for HECMs electronically through secure online portals. This gives potential borrowers easy access to loan applications and a streamlined application process. Receiving proceeds is also easier. Before 2013, borrowers would have to wait for a paper check. Loan disbursements are now made electronically.
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.