The reverse mortgage: how do banks profit?

The reverse mortgage: how do banks profit?

Most of the money lenders make comes from the interest that builds up on the loan amount. They may also charge an origination fee. They get paid when they sell loans to buyers on the secondary market.

Reverse mortgages are far from dull. This type of loan was made in 1961 in a small bank in Portland, Maine. It lets older homeowners use their home wealth while still living in and owning the home. In the 1980s, the government started backing this type of loan. Since then, it has been changed over and over again as new problems and needs come up.

A widow keeps her home with the help of the first reverse mortgage.

It is said that the first reverse mortgage for seniors benefits was given to the widow of a football coach in 1961. The story goes that Nelson Haynes, who worked at a small bank in Portland, Maine, called Deering Savings & Loan, was trying to help the wife of his high school football teacher stay in her home after her husband died. The reverse mortgage was his clever answer.

Haynes's discovery started to get notice and support from people like UCLA professor Yung-Ping Chen, Jack Guttentag of the Wharton School, and Ken Scholen, who worked with the Wisconsin Board on Aging and wrote three books on the subject. The idea of a product that lets older homeowners use their home's equity to stay in their houses hit a nerve. By the beginning of the next decade, private banks had started to offer their own reverse mortgages.

Backward mortgages Get help from the government

The 1980s brought the next big change. At the beginning of that decade, the Senate agreed with a plan by then-Sen. John Heinz, R-Pa., to have the Federal Housing Administration (FHA) cover reverse mortgages.

After some initial opposition from the U.S. Department of Housing and Urban Development (HUD), Congress approved a pilot program in 1987 to give government-insured reverse mortgages. These loans are now called home equity conversion mortgages (HECMs).

 In 1988, the Housing and Community Development Act was signed into law by President Ronald Reagan. This was the start of the modern reverse mortgage.

The HECM program will stay in place.

In 1994, Congress told lenders that they had to tell borrowers the total annual loan costs at the start of the application process. This was done to make things clearer and make it easier for borrowers to compare prices and shop around. Then, four years later, the HUD Appropriations Act made the HECM scheme last for good.

This decade also saw the start of Fannie Mae's own reverse mortgage, called the Home Keeper (which has since been stopped), and a change in 1996 that made it possible for homes with up to four units to qualify for a reverse mortgage as long as the borrower lived in one of the units as their main home.