The reverse mortgage has come a long way from its inception in 1961. Through all these years, there have been many misconceptions about what the product is and does. The truth is, in present day, the reverse mortgage is an ethical product with the simple intention to help seniors age in their homes.
Most negativity about reverse mortgages stemmed from certain practices in the 1980s, when the product was not yet fully monitored by the U.S. Department of Housing and Urban Development (HUD). However, since then, the reverse mortgage has become one of the most heavily regulated and safest mortgage products available on the market.
The following are 10 reasons why a reverse mortgage is the ethical and safe financial tool you can trust today.
1) Federal Insurance
In 1987, the Federal Housing Administration (FHA) authorized federal insurance for reverse mortgages with the Housing and Community Development Act. For the borrower, this guaranteed the availability of funds. For the lender, this assured compensation if ever the loan balance exceeded the home’s value.
2) Non-Recourse Provisions
HUD mandated that the FHA-insured reverse mortgage is a non-recourse loan. This means that the property is the only collateral that can be taken to pay back the loan. There is no personal liability on the borrower’s part. This protects the borrower from owing on a loan that costs more than the house is worth when sold.
3) Required Financial Counseling
To protect the consumer, federal law requires the potential borrower to receive pre-loan financial counseling by a HUD-approved counseling agency. The potential borrower is therefore able to receive financial counseling from an unbiased, independent advisor. During these sessions, the trained counselor will help the borrower understand the features and costs of a reverse mortgage.
4) “Lifetime” Reverse Mortgage
In 1991, HUD released new regulations that made reverse mortgage insurance available to all FHA lenders. Consequently, Lenders Homefirst and Home Equity partners were then able to devise the first “lifetime” reverse mortgage program, allowing monthly disbursements to span the life of the homeowner rather than only a set amount of time. This “monthly payment for life” is limited to the tenure or modified tenure plans. With these plans, the borrower must maintain the home as a permanent residence, continue to pay property taxes and home insurance, and keep up basic home maintenance. The lender will set aside a specific amount of money for a line of credit, and the borrower may outlive the monthly payment stream.
5) NRMLA Is Founded
In 1997, Jeffrey Taylor and Peter Bell founded the National Reverse Mortgage Lenders Association (NRMLA) with the intention to enhance the professionalism of the reverse mortgage industry. Since then, the association has become the national voice of the reverse mortgage industry, striving to provide resources to lenders, educate consumers, and promote a positive experience for both. In addition, NRMLA members must adhere to a strict Code of Ethics & Professional Responsibility.
6) Limits on Rates and Fees
In 1999, AARP and NRMLA both extended support for nationwide limits on origination fees charged by the lender. Congress approved this recommendation in 2000. With HUD mandates and federal statutes firmly in place, reverse mortgage rates and fees charged to the consumer are regulated and controlled. In fact, the reverse mortgage’s formula for determining the origination fee was determined by Congress. This guarantees that there are no “excessive fees” in a reverse mortgage. The Federal Truth in Lending Act (TILA) requires lenders to divulge the terms and costs of the loan, such as the APR, payment terms, and any line of credit charges.
7) Reverse Mortgage Exams
In 2000, an exam designed to ensure that reverse mortgage counselors understand how the product operates was completed by 425 counselors in 43 states throughout the nation. This was the first official national reverse mortgage financial counseling exam designed to help counselors assist applicants in understanding the reverse mortgage product.
8) Reverse Mortgage for Purchase
In 2009, HUD introduced the FHA Reverse Mortgage for Purchase program. This program was created by Congress to help seniors transition into a home that better suited their changing needs, cutting costs and streamlining everything into one transaction.
9) New Reverse Mortgage Rules
In September 2013, the FHA put into effect new rules meant to encourage seniors to tap into their equity strategically, and use the reverse mortgage as a long-term financial planning tool rather than a crisis management tool.
10) Non-Borrowing Spouse Rights
In 2014, HUD announced new rules regarding non-borrowing spouses for loans closed after August 4, 2014, which will allow a non-borrowing spouse to remain in the home even after their borrowing spouse has passed.
Since 1961, the reverse mortgage industry has been working hard to build a product worthy of our nation’s growing senior population. With these ethical safeguards in place, a consumer should feel safe taking a reverse mortgage loan and borrowing with confidence. Together, the Federal Housing Administration and the reverse mortgage industry strive to do everything possible to help our nation’s seniors stay just where they want to be – at home.
This article was updated 07/28/2014 at 11:00am