Very few new financial products, in my memory, have gotten off to a rockier start than the HECM (Home Equity Conversion Mortgage), or, in the common vernacular, the Reverse Mortgage. Originally conceived and written in 1961, the HECM is designed to enable older people who are home-wealthy, but cash flow poor, to stay in their homes by utilizing their equity. What a great idea!
So why did the Reverse Mortgage start so poorly? First, it was “invented” in 1961, and not by Ronald Reagan, as the commercials falsely claim. The U.S. Government got involved in the HECM in 1969, when the Senate Committee on Aging heard and liked a proposal by UCLAS Professor Yung Ping Chen. Moving at the speed of the Senate, they held the first hearing in 1983! By then Reagan had been inaugurated, and Senator John Heinz proposed that the government guarantee the HECM by the Federal Housing Administration, or FHA.
In 1987 the Reverse Mortgage Pilot Program was signed into law, and the product was officially off the ground. It has been strengthened, modified, and expanded over the years, until today it has achieved status in the world of personal financial planning. But it was not always so.
Early advertising was a contributor to the poor start, as I see it. We have been conditioned to be wary of celebrities touting new and innovative ideas and concepts, so the likes of Fred Thompson and Henry Winkler did little to assure us that the product was worthwhile. Adding to the disdain for the HECM was the cost of origination, which was quite steep, and the lack of flexibility within the industry.
A more significant problem, perhaps, was the way the early mortgages were written. Too often, they were used by people who wanted to get a large, one-time cash payout from their home equity, and many of them blew through the money. This rendered the HECM a low-value, high-cost boondoggle.
Times have changed, and the HECM has flowered into a valuable planning tool, as well as a vehicle for keeping older Americans in the homes that they loved and paid for over long careers. What happened to effect this change?
First, the cost of initiating a Reverse Mortgage has fallen dramatically. Far more importantly, however, were the various new ways of utilizing the product for lifetime security. My hope is to help people understand the hows and whys and wherefores of this potentially life-changing financial concept. Upcoming blogs will detail some of the practical applications of the HECM in comprehensive personal financial planning.
For more information, please contact Marshall Gallop with RMF, and listen to the November 19th Podcast of the Van Wie Financial Hour for our discussion with Marshall about the Reverse Mortgage as a planning tool.
Some other resources for those that are interested in using a Reverse Mortgage can be found at the following links:
- National Reverse Association Publication: 25 ways to use a reverse mortgage
- Wade Pfau's book on Reverse Mortgages
- “The Hidden Value of a Reverse Mortgage Standby Line of Credit" by Wade Pfau, 2014
- “Incorporating Home Equity into a Retirement Income Strategy.” by Wade Pfau, 2016
- A list of resources for information about reverse mortgages