The Government’s Redesigned Reverse Mortgage Program

Accessing home equity will become increasingly important in a world where retirement needs are expanding – people are living longer and face rapidly rising health care costs – and the retirement system is contracting – Social Security replacement rates are declining and employer-provided pensions have shifted from defined benefit plans to 401(k)s where balances are modest. Reverse mortgages offer a mechanism for tapping home equity for those who want to stay in their home. Nearly all reverse mortgages today are government-insured Home Equity Conversion Mortgages (HECMs). The financial crisis put pressure on both the insurance program and on the borrowers. Declining home prices meant that lenders could not recoup the full amount of the loan when the houses were sold, requiring the government to make up the difference. And financially troubled borrowers withdrew much of their money at closing, leaving them with few resources to sustain homeownership, which led a number to default. In response, the government has redesigned the HECM program. This brief describes this redesign and its impact on borrowers and government finances. The discussion proceeds as follows. The first section describes the HECM program. The second section covers the impact of the financial crisis on how borrowers used the program and on the program’s finances. The third section reviews the recent changes and their likely effects. The final section concludes that the redesigned HECM program should make reverse mortgages better for borrowers and significantly improve the solvency of the HECM insurance program.