Originating: The True HECM Originator

Written by Bob Tranchell

I consider myself to be a HECM originator, but that title truly belongs to Dr. Yung-Ping Chen, whom one might call the architect of the HECM. Because of his efforts, we are able to offer this life-changing product, perhaps unaware of the journey involved in bringing it into being.

Dr. Chen presented his first talk on the idea of voluntarily converting net equity in the home into a lifelong flow of income with continuing occupancy of the house at an economics seminar in December 1963. In 1969, he testified before Congress on what he called the Actuarial Mortgage Plan. It was the first time Congress would hear testimony on the concept, and it began an almost 20-year quest for legislation that was finally written as Section 255 of the National Housing Act of 1987. I believe we owe a debt of gratitude to Dr. Chen, whose work inspired an important financial tool that would allow home equity conversion. This article is a tribute to a man whose intellect, research and compassion contributed greatly to establishing the HECM. It also outlines some of the lessons I have learned from him.

Dr. Chen’s balanced education and research gave him a unique perspective into issues of aging and finance, and allowed him to shape his vision as to how an equity conversion mortgage should function. He received a B.A. in economics from National Taiwan University, and an M.A. and Ph.D. in economics from The University of Washington, Seattle. Before studying economics, he studied law at Soochow University in Shanghai, China. In his mid-50s, he studied mental health sciences at Hahnemann University in Philadelphia. With training in multiple disciplines, he was well-equipped to consider aging and finance. He has a list of honors and awards ranging from valedictorian at Shanghai High School in 1948 to recipient of the John S. Bickley Founder’s Award Gold Medal for Excellence from the International Society of Insurance in 2012.

His research began in the early 1960s. While studying income and wealth distributions among older adults, he became intrigued by the “income poor but house rich” phenomenon in the context of elder poverty. Incidents of poverty would be lower if poverty were measured using net worth rather than using income alone. For poverty measurement based on net worth to make practical sense, however, non-liquid assets such as a home must be sold. However, older homeowners were typically reluctant to sell their homes. It was in his work to resolve this dilemma that he hit upon the idea of a voluntary conversion of net equity into an income stream or spendable cash, while assuring lifetime occupancy in the home. Over the years, he researched and testified to what would become the HECM. I recently had the privilege of talking with and learning from Dr. Chen, which gave me a great appreciation for the man himself and also taught me some invaluable lessons.

Three Lessons Learned

1 Opposition and Support

From the start, Dr. Chen’s call for a home equity liquidation tool was met with opposition. His detractors were fellow professors and researchers, including some in a federal agency. The opposition ranged from comments like “the idea will never fly” to “the idea is unsound and it does not help the renters,” expressing sentiments that Chen says “represented a depth of dislike or disapproval that was palpable.” I relate those responses to what originators face today. I have spoken with older adults whose visceral reaction to a reverse mortgage was so strong they decided to face foreclosure rather than utilize the loan. I have sparred with financial planners whose dislike of the concept of a reverse made them unwilling to even listen to another side. I take encouragement from Dr. Chen’s methodical, consistent teaching and research that allowed him to stay the course and adequately articulate his position. He also emphasized that he took courage from support and even praise from other professors and researchers, including some in federal agencies. I believe we can all relate to the encouragement we feel when someone outside our industry is positive or validates the use of HECMs in retirement planning. We need more voices like Chen’s to help bring the HECM into prominence as a widely accepted mainstream product.

2 A Balanced Approach

In reading some of Chen’s papers and testimony, as well as conversations I have had with him, I was struck by the clarity he had from the start, and continue to be challenged by his desire to be balanced. I was impressed that he studied mental health sciences so that he could, as he put it, “learn about behavioral and mental health aspects of aging to complement my studies of the financial and economic dimensions of aging.” His presentation to the Senate Committee on Labor and Public Welfare in 1971 called for a continued balanced approach to researching aging with an emphasis on social and economic issues. He discussed the advances made through biomedical research and felt the same attention would be beneficial in the economic and social aspects of aging.

“In bio-medical terms, what we would like to see is more longevity with greater vitality, so that we may live longer with greater physical and mental [psychological] health. This is certainly a most desirable objective. However, there are other dimensions of life—the social and economic aspects—which we may compare to an ‘economic clock.’ We, likewise, would wish to slow down the ticking of that clock and make each tick sound stronger. As things stand now, our social and economic institutions have not, in my opinion, kept pace with the changes in the bio-medical field. The significance of the socioeconomic aspects of the quality of life cannot be overemphasized.

I like the articulation of slowing down the economic clock and making each tick sound stronger. The call for researching the social and economic aspects of aging with the same clarity as biological aging is excellent. As an originator, I benefit from knowledge of the biological, social and economic aspects of aging. Expressing ideas like slowing the economic clock is a great way to communicate what a reverse might accomplish for my clients.

3 The Mortgage Insurance Perspective
I asked Dr. Chen where the idea of government involvement came from. I noted that reverse mortgages were available before the FHA’s HECM came into being, and there were mortgage tools in France that were not government-backed. His response summarized a great way of looking at mortgage insurance: “The idea for the government to serve as an insurer seemed to me to be a logical expression of community solidarity to empower the individual and families to exercise individual responsibility.” I never heard anyone express the reason for and impact of mortgage insurance in that way. The government as an expression of community and mortgage insurance as an expression of solidarity, empowerment and responsibility are very unusual but very effective articulations. They resonated with me and gave me a different perspective on mortgage insurance premiums.

Dr. Chen has spent a lifetime researching and teaching about issues of aging and the economics of aging. His work was a catalyst for and has had a profound impact on our industry. The conversations he and I have shared have been both encouraging and helpful in how I explain the effect a HECM can have. I am grateful to him for the years of testifying and research that have gone a long way to advance this important financial tool. Our conversations were enjoyable and increased my respect for him and for those who labored long before the HECM was available. Thank you, Dr. Yung-Ping Chen, for your years of dedication to older adults and their financial options. You taught me a great deal and I am a better originator for it. You, however, will always be the true originator. n


  • The_Cynic

    Yet this is not all government does. It helps defray the costs of this insurance program.

    If this insurance program were in the private sector, it would have gone bankrupt years ago. Speaking as a conservative, taxpayers pay all of the operating and administrative costs of running day-to-day insurance operations. All the MIP does is pay actual losses and when the MMI Fund has a sufficient reserve, its profits can be used to help defray the costs of counseling.

    So far using the government as the insurer has been a disaster from a cost perspective. Last year the reimbursement portion of this program suffered a $7.7 billion loss. If HUD had not taken $1.7 billion out of the US Treasury and another $5.8 billion (net) out of MMI Fund forward mortgage programs, the balance in the HECM portion of the MMI Fund would be negative by $8.7 billion rather than the negative $1.2 billion it is right now.

    Idealism is one thing, a practical loss of $8.7 billion plus all of the costs absorbed through HUD operations as part of the budget process, makes the HECM program a very costly program. Some wonder if that is what caused Carol Galante to bail out of HUD and go on to teaching. The HECM program was never designed to be breakeven over all but so far it has not been breakeven at the lender loss reimbursement level to date.