In the HECM business, it’s not uncommon to hear people talk about change. You have surely heard—and probably even read within this publication’s pages—that “change is the only constant” in the reverse mortgage industry. Well, we decided to take a look back at all that change and review the ups and downs that the industry has endured since the HECM product was first established as part of a pilot program in the 1980s.
Since then, we’ve witnessed the rapid growth of Ginnie Mae HMBS and ridden a rollercoaster of origination volume. We’ve seen the program expand to include innovative products like the Saver and HECM for Purchase, redefining the possibilities for seniors who want to benefit from their hard-earned home equity. We’ve seen our counseling practices improve and consumer awareness increase. We’ve read Mortgagee Letter after Mortgagee Letter as HUD has continually modified the rules of the game. We’ve waved farewell to big bank lenders and congratulated smaller companies as they reach record volumes. Finally, we’ve watched anxiously as the CFPB gained regulatory power, setting out to improve consumer protections.
If our past is any indication of what’s to come, we can expect the changes to keep on rolling as the HECM program evolves in order to remain relevant so that we can continue to provide a valuable financial service to seniors homeowners.
*To view this article in its intended format, access the pdf version here: A History of the HECM.
A Timeline of the HECM’s Evolution
The first reverse mortgage is issued by a savings and loan company for the widow of a football coach in Portland, Maine.
The reverse mortgage concept begins to take root at a congressional hearing before the Senate Committee on Aging. UCLA professor Yung-Ping Chen testifies: “I think an actuarial mortgage plan in the form of a housing annuity can serve two purposes: First, to enable older homeowners to realize the fruits of savings in the form of home equity; and second, to enable those homeowners, who wish to remain in their homes either for physical convenience or for sentimental attachment, to do as they wish.”
Intrigued, the committee chairman responds, “Well, that is interesting.”
Academics continue to research the concept’s feasibility. A paper by Jack Guttentag of The Wharton School discusses consumer demand: “The reverse mortgage is badly needed; it is also very different from, and more complex than, any existing financial instrument. It constitutes a challenge of the first magnitude to the imagination of the government, and to the ingenuity and adaptability of the private financial system.
Senator John Heinz issues a proposal suggesting further investigation of “the relatively new and promising idea” of home equity conversion. “Today’s hearing is the first congressional hearing concerning this issue,” Heinz testified. “I hope that today we can move toward a definition of the remaining steps necessary to truly unlock the value of home equity for the millions of older Americans who can appropriately benefit from its promise.” The Senate approves the proposal, which requests FHA insurance of reverse mortgages.
American Homestead unveils the Century Plan, establishing the first mortgage of its kind that kept the loan in place until the borrower vacates the residence, laying the groundwork for government-insured reverse mortgages. The New York Times covers the new product, noting widespread consumer interest: “Reverse mortgages have been so long in coming that many people hear about them even before they are available in their areas… American Homestead said the company receives 200 to 300 letters a day.”
Congress passes a reverse mortgage pilot program called the Home Equity Conversion Mortgage Demonstration.
HUD selects 50 lenders by lottery to participate, allowing each to originate only 50 loans.
FHA holds AARP-conducted counseling training sessions to tackle education concerns.
The first FHA-insured reverse mortgage is closed on October 19 by the James B. Nutter & Company of Kansas City, Missouri.
Fannie Mae says it will purchase FHA-insured HECMs.
As the program approaches its one-year anniversary, the number of HECM loans closed totals 157. HUD submits an interim report to Congress, says the potential demand is substantial and the program is growing steadily. The volume cap is raised from 2,500 to 25,000 loans through fiscal year 1995.
In this early phase, the median borrower only takes about 30 percent of authorized loan proceeds in the first year. This number will begin to creep up as the program evolves.
HUD submits a favorable evaluation of the demonstration to Congress, saying that HECM volume has “increased rapidly” as participants become more familiar with the product. The report calls the program a “useful mechanism” and notes that borrowers “appear to value the flexibility designed into the program” through various payment options.
The number of qualified lenders and counselors grows: 52 lenders are now originating in 38 states.
Four thousand loans are originated in this fiscal year alone, and the program’s total reaches 7,991. The median age for borrowers is 76 years old.
Congress makes TALC disclosures applicable to reverse mortgages, requiring lenders to provide total annual loan costs at the start of the application process, enabling borrowers to shop products and compare prices.
HUD submits an evaluation report to Congress, saying that new loans are closing at a rate of 300 to 400 per month as the program sees early success. The study notes that, with median closing costs totaling $4,465, the expense is a concerning stumbling block for potential borrowers. Also noted is a concern over the limited access to capital as Fannie Mae is the sole purchaser. The report deems the mortgage insurance premium to be adequate, asserting that the value of premiums collected surpasses the value of insurance claim losses.
The cap on insurable loans is raised to 30,000 through fiscal year 1996 and then to 50,000 through fiscal year 2000. The loan is modified to allow properties of up to four residences if the mortgager occupies one unit.
The number of HECM lenders peaks at 195, but then begins to decline in the next two years as lenders complain that the origination fee prevents profitability. The median borrower age drops to 72.
NRMLA is founded to represent lender interest.
The HECM program becomes official! The HUD Appropriations Act makes the pilot permanent and increases the number of allowable outstanding loans to 150,000. Congress awards funds for counseling, consumer education and outreach. Safeguards are put in place for borrowers to ensure the full disclosure of fees and prevent unnecessary charges. HUD is tasked with finding alternative ways to educate borrowers.
More than 38,000 reverse mortgages have been insured at this point.
An AARP survey indicates that 51 percent of consumers age 45 and older have heard of a reverse mortgage.
The industry grows as the number of HECM servicers increases from one to four firms.
Financial Freedom purchases Transamerica and develops their Cash Account product, creating what will be the most widely originated proprietary HECM product.
Lehman Brothers introduces the first private-label reverse mortgage securitization, and the majority of loans for the pool are originated by Financial Freedom.
A Mortgagee Letter is released, announcing an increase in origination fees to either $2,000 or 2 percent of the MCA. HUD says it hopes the ability to generate higher revenue will encourage more lenders to participate.
HUD releases another evaluation of the program, noting loan volume is growing, borrowers are reporting high levels of satisfaction and premium collections are expected to exceed insurance claims.
HUD and AARP partner to train and test counselors and establish consistent HECM counseling procedures and policies.
FHA implements rules for HECM refinancing, allowing for a special option in which the borrower
is required to pay only the upfront MIP and the difference between the original appraised value and the new appraised value or FHA loan limit.
The volume cap is raised again from 150,000 to 250,000 loans.
The first HECM refinances are made. In the next three years, refinance loans will constitute between 3 and 7 percent of all HECMs originated.
Volume grows steadily as originations reach 50,000 per year. AARP estimates the potential market is about 13.2 million households.
Wall Street investors enter the secondary market. As investors begin issuing private-label HECM securities, they give rise to a competitive interest rate environment. An AARP study says the advent of HMBS “suggests that lower prices and better products are likely to appear within the next few years.”
The cap is raised again to 275,000 loans and a national loan limit of $417,000 is established.
Volume continues to increase, totaling 84,000 loans this year.
AARP conducts its first national survey of reverse mortgage borrowers and concludes that most borrowers take out a loan to “improve their quality of life and/or plan for emergencies.” In the coming years, surveys will indicate a drastic change in borrower motivation.
The first Ginnie Mae security is issued.
FHA says monthly adjustable rates can be calculated using the one-month Libor.
Proprietary reverse volume peaks at 2,599 loans for a total of approximately $2.6 billion in loans.
At this time, 87 percent of borrowers are choosing a line of credit, with only 13 percent choosing a monthly disbursement plan. The median borrower takes out 82 percent of available funds within the first year.
A nationwide poll indicates that 72 percent of baby boomers have heard of a reverse mortgage.
An AARP poll says 93 percent of borrowers surveyed reported a good experience with their loans.
The SAFE Act requires states to adopt uniform procedures for licensing and registering HECM loan originators.
The Housing Economic Recovery Act of 2008 places limits on origination fees, establishes rules specifically prohibiting cross-selling and sets forth guidelines to promote counseling independence.
HECM insurance shifts from the General Insurance Fund to the Mutual Mortgage Insurance Fund (MMI).
FHA says Ginnie Mae’s new fixed-rate product could be structured as a closed-end loan, giving rise to the fixed-rate, lump-sum product. Prior to this date, all HECMs were open-end loans and nearly all carried an adjustable interest rate.
The median borrower is now taking 88 percent of loan proceeds within the first year, a 6 percent jump from the previous year.
The housing bubble bursts.
The HECM for Purchase is created. By the end of this year, 130 Purchase transactions were completed as the program begins to catch on.
Congress increases the HECM loan limit to $625,500.
The fixed-rate, lump-sum loan becomes the dominate product with more than 60 percent of market share. The monthly adjustable Libor becomes the most popular rate option.
Fannie Mae’s market share falls to just 10 percent as Ginnie Mae’s volume skyrockets—it jumps from $1.36 billion in 2008 to $8.54 billion in one year’s time.
The number of HECM loans peaks at 115,000. HECM refinances also peak, constituting 8.5 percent of all HECMs.
FHA lowers the principal limits for HECMs by 10 percent, reducing borrower proceeds.
The Coalition for Independent Seniors (CIS) is formed to advocate for seniors looking to access their home equity.
Ginnie Mae sees a record year with nearly $11 billion in HMBS.
HUD implements the FIT tool to assist counselors in determining borrower eligibility.
A new study reveals that most HECM borrowers use the loan to alleviate debt, a noted change from earlier surveys.
FHA increases the ongoing MIP from 0.5 percent to 1.25 percent per year and lowers the interest rate floor for the first time in HECM history from 5.5 to 5.0 percent.
Loan volume declines 30 percent.
Generation Mortgage Company launches the Generation Plus, a jumbo market loan with a $6 million limit and a fixed-rate, lump-sum requirement. It is the only proprietary loan on the market.
Dodd-Frank transfers regulatory authority of the HECM to the CFPB on July 21. Several months later, Richard Cordray is appointed director of the CFPB in a recess appointment that draws controversy.
Leading lenders Wells Fargo, Bank of America and MetLife exit the reverse space.
Live Well Financial earns HMBS issuance, joining a short list that is beginning to grow as Silvergate Bank and Security One Lending follow suit. Meanwhile, Ginnie Mae tightens issuer requirements, increasing net worth requirements from $1 million to $5 million, effectively limiting the number of lenders that can issue.
The CFPB issues a report to Congress on the state of the HECM program. The study states that further research is needed because “reverse mortgages have the potential to become a much more prominent part of the financial landscape in the coming decades.”