Reverse Mortgage Basics

Submitted by: Onisha Williams

The guy who created the modern home loan had time, money, and an apartment!” ~ Onisha Williams

When you start exploring the Reverse Mortgage product the first thing that you may recognize is that it has evolved. I liken it to the evolution of anti-perspirant.

The evolution – Ultimately a Reverse Mortgage is a type of home loan, but beyond this there is a lot of debate surrounding the definition. To define it properly let’s review the history of this type of product. Prior to HUD creating the FHA Home Equity Conversion Mortgage (HECM) Program in 1989, a loan that was scrutinized by real estate where the lender provided funds to a borrower, often times a Senior or someone in need, with a promise to repay at some point in the future was coined a “Reverse Mortgage”. Why Reverse? In this type of transaction, instead of the borrower making payments to their lender, the ‘reverse’ happens - the lender pays the borrower to have an interest in their property. Under private terms of agreement and no Federal oversight the amount of money borrowed, terms of repayment, and consequences of default simply depended on the terms arranged between the parties.

Development - As is often the case where there is no regulation or oversight of financial transactions, over time there was a trail of egregious accounts of people losing their home under the guise of financial agreements coined “Reverse Mortgages”. Many times borrowers willingly agreed to the terms of these loan agreements because they sounded good to them at that time and their needs were being met. To the dismay of many borrowers, upon sale of the home they were unable to retain any or most of the appreciation gained during the loan agreement. In some cases, the transgression was not unveiled until the borrower’s death by their heirs. This understandably caused further confusion.

Over the last 30 years the need for a Reverse type product for Older Adults looking for additional money to maintain their quality of life, has been recognized and there is extensive research to support the ideal use and strategy of this type of product (http://www.reverse.org/History.HTM) The culmination of this research resulted in the development of the FHA Home Equity Conversion Mortgage. The FHA HECM was legislated in 1989 and has most recently been updated by the Housing and Recovery act of 2008.

Just like anti-perspirant the Reverse Mortgage is subject to Urban Myths, but the value in the valley is in being able to uncover the facts to make clear, rational decisions about the best way to manage a finite resource…your money!