A federally issued reverse mortgage that allows a select group of homeowners to receive a monthly payment against the equity in their homes.
Imran Husain, who recently graduated from the University of Toronto with a degree in Rotman Commerce specializing in Finance and a minor in Economics, is set to join Turner and Townsend in Infrastructure Consulting. His experience includes roles in real estate analysis at Hi-lo Investments, a stint at Brookfield Properties, and serving as a Financial Research Analyst at Wall Street Oasis. Imran's leaded as Vice President of the Rotman Commerce Real Estate Association, where he organized events and engaged with industry leaders. Alongside real estate development case competitions during his time at school.
Reviewed By: Celine Khattar
Coming from a background in Financial Engineering, Céline is a Financial Writer with 2+ years of experience in the Fintech industry. Currently based in the UAE, she covers diverse topics within the space, and is constantly following the latest market news and developments.
Last Updated: June 5, 2024 In This ArticleA home equity conversion mortgage (HECM) or a Home Equity Loan is a federally issued reverse mortgage that allows a select group of homeowners to receive a monthly payment against the equity in their homes.
Home equity loans were introduced for homeowners aged 62 and older who wanted to use their home equity to generate cash flows throughout retirement.
Therefore, a home equity loan is categorized as a reverse mortgage, allowing the homeowner to convert their equity into cash through a regular series of cash flows over a predetermined period.
Hence, such an instrument creates an income source that can help individuals' retirement. The requirement that the homeowner be aged 62 or over is put in place to cater this instrument to a specified group of people.
The Federal Housing Administration (FHA) insures home equity loans. This means that the federal government guarantees or insures the loan payments in case the bank defaults.
A Home Equity Conversion Mortgage and a Reverse Mortgage have much in common. All home equity loans are classified under reverse mortgages as they are an instrument that allows an owner of an asset to convert their equity for regular payments.
The first reverse mortgage was approved in 1961, when a supposedly small bank in Portland, Maine, devised a creative solution to help a woman keep her home while staying at home after her husband's sudden death.
Such an idea gained traction, so the Federal Housing Administration (FDA) proposed launching several types of reverse mortgages in the U.S. This proposal gained political approval and support in the 1980s, and thus, the first home equity loan was introduced in 1989.
By 1994, the government pushed reverse mortgage lenders to make costs transparent to customers. Further, the government made this type of reverse mortgage permanent through the HUD Appropriations Act.
At this time, Fannie Mae tried to introduce its reverse mortgage called the "Home Keeper," which has since been discontinued. A change also allowed borrowers with four units to be eligible for a reverse mortgage as long as one of the units was their primary residence.
In the 2000s, The United States Department of Housing and Urban Development (HUD) increased reverse mortgage origination fees, a critical source of revenue for lenders to attract more firms to offer such instruments.
Further, there was also a partnership between the HUD and the American Association of Retired Persons (AARP) to improve counseling services for home equity borrowers after information that borrowers were struggling to pay property owning costs such as taxes and insurance.
By this time, the home equity market was doing well and helping cash-strapped homeowners in their retirement. Therefore, those who didn't qualify for the selective home equity loan lending criteria could access other new instruments, such as jumbo reverse mortgages.
After the Great Recession , origination fees were at all-time lows, which impacted the reverse mortgage space. However, the most common home equity loans were still in demand and subject to much tighter legislation.
In 2010, the home equity loan saver was introduced, which allowed seniors to use the lower equity in their homes as collateral for the loan. This idea offered lower overall fees. However, it did not work as expected; hence, it was discontinued in 2013.
The Reverse Mortgage Stabilization Act was introduced in 2013, which introduced a few changes to the reverse mortgage space in terms of regulation and limits.
Today, home equity loans continue to be in demand. However, rapid inflation has increased the national loan limit from $822,375 to $970,800.
It will continue to be interesting to observe how home equity loans evolve and what type of new instruments will be introduced in the next decade that help homeowners in their retirement.
A home equity loan can be structured differently based on the loan's purpose for the individual applying. Therefore, payments and other aspects of the debt may be constricted distinctively.
Some characteristics of a home equity loan can be altered to meet the homeowner's goals. For instance, consider some of the following ways in which the proceeds of the home equity loan may be distributed:
