Educational Module-3: Reverse Mortgage History

In the post-World War II housing boom, mortgage lenders began to experiment with different formats for residential mortgages.

The typical mortgage loan used the now classical 80/20 format, with the loan at 80% of the property price/value and 20% the downpayment/equity value. These loans were usually full amortization over 30 years where the monthly payment included both principal and interest.

A new loan concept, intended for senior homeowners, used the existing 80%/20% format but no payments were required, and the monthly interest was added to the loan's balance.

The idea was first put into practice by a lender in 1961 in Maine. Soon, several lenders were aggressively promoting the new "Reverse Mortgage" as a boon to senior borrowers' finances.

With the loan under the lender's control and based on the traditional 80%/20% format, the interest was added monthly to the loan's balance which quickly consumed the available equity (and property value), the lender then put the loan in default, and some seniors ultimately lost their homes.

Unfortunately, those Reverse Mortgages had serious shortcomings and soon gained a negative reputation (which unfortunately and inappropriately still lingers today).

Even so, these Reverse Mortgage loans continued to gather acceptance and sales increased through the 1970s, due in part to very aggressive salespeople and sales techniques. The negative results came to the attention of industry leaders, academics and the Government, who collectively began to study these loans to find ways to improve them as they did help seniors.

By the mid-1980s the analysis resulted in the creation of a new government-sponsored Reverse Mortgage loan, with the more appropriate name of the Home Equity Conversion Mortgage (HECM). Pronounced as "heck-em"

In 1987, Congress passed a bill for a "Demonstration" of the HECM loans, which was successful. In late 1988 Congress made the HECM loan into law, and the first of the new HECM loans were closed in early 1989.

Since its inception, the HECM loan has become very successful with over 1,000,000 seniors using it and has become the standard of the Reverse Mortgage loan industry.

The HECM loan became the only loan format the Government allowed (until recently), and all lenders conformed to its structure and guidelines with the only real difference being the Margin a specific lender would use and the value of an individual loan on the secondary market based on its Margin and borrower's financial profile.

Consistent with providing a mechanism where seniors could convert a portion of their equity there is also built in a number of critical improvements which are explained in detail in the next Module – HECM