These days, it’s not very common for the topic of reverse mortgages to appear as the center of a news story in your local newspaper, and even newspapers themselves are not as prominent as they used to be. Back when tapping into your home’s equity by using one of these products was a new concept, though, a reverse mortgage as a way to help a senior make ends meet in retirement was something worth writing about and sharing.
So was the case in March of 1979, when The Times-Tribune in Scranton, Pa. printed an article by New York Times News Service reporter Debroah Rankin on the increasing prevalence of reverse mortgages. The product category was still in its infancy, especially considering that the now-ubiquitous Home Equity Conversion Mortgage (HECM) program under the Federal Housing Administration (FHA) was the better part of a decade away at the time of the article’s publication.
When doing research for a content project, Aging Media Network Associate Director of Custom Content Jack Silverstein came upon the vintage article, and RMD decided to share it with contemporary reverse mortgage product educators to get their perspectives on how the product has changed over the course of the past four decades.
1979: ‘Reverse mortgages may aid retirees temporarily’
In her article, Rankin describes inflation as “the bane of existence” for many elderly people. In 1979, the inflation rate was 11.35% according to the Consumer Price Index (CPI) inflation calculator, considerably higher than the average inflation rate of 3.14% per year between 1979 and 2020.
“[Older Americans’] problem has been to find a way to make that investment [in their homes] pay off,” Rankin writes in the vintage article. “Now there may be a way for them to cash in on the increased value of their homes and live in them, too through something called a ‘reverse mortgage.’ The concept of a reverse mortgage was approved last December (1978) by the Federal Home Loan Bank Board, which regulates federally chartered savings and loan associations.”
By the time Rankin’s article was published, the HECM program was still relatively far off, since the Housing and Community Development Act of 1987 that gave birth to it went into effect in February of 1988, nearly a decade after this article’s initial publication.
“Basically [a reverse mortgage] involves taking the accumulated cash value out of a home in the form of a loan and spreading the loan payments over the future so that the borrower has the necessary cash flow to enable him to continue to live there,” Rankin describes. “The cash flow can come In the form of an annuity purchased from an insurance company or in regular monthly payments from the bank that writes the reverse mortgage.”
Even in 1979, though, reverse mortgages were described as being “not for everyone.”
“It’s ideal for someone who wants to stay in his house for five or seven years and then go into a retirement home,” said Donald G. Edwards, a financial economist with the Bank Board to Rankin in 1979. “But there may be a problem for someone who wants to live in his home indefinitely.”
Potential problems with the product concept in 1979 are not all that different from the same kinds of caution that is communicated to potential borrowers today: there’s always a chance that a person may outlive the value of their home, or a foreclosure could result in the displacement of the owners. For that latter scenario, Rankin solicited the input of Nelson B. Haynes, the man credited as the originator of the first American reverse mortgage in 1961.
“That’s the danger with this kind of instrument, and it’s something I worry about every time we do one of them,” said Haynes to Rankin. He is credited as the chief executive officer of the Deering Savings and Loan Association in Portland, Me., at the time one of two state-chartered savings and loan associations in the nation that offered reverse mortgages. “Luckily we’ve never had to do it.”
Still, optimism for what the product could mean for seniors back in 1979 was high. The Bank Board hailed the reverse mortgage as “a new financial service ‘of major social significance’ that could assist thousands of elderly people,” Rankin describes in her article. Still, by this point in time, there was nothing resembling a rush of organizations trying to get their own reverse mortgage offerings approved.
“It’s not widespread and it’s not likely to become widespread,” said Dr. Thomas R. Harter, chief economist of the Mortgage Bankers Association in Washington to Rankin for the article. Another unattributed banker reportedly told the reporter, “The question is whether you want to be in the business of throwing little old ladies out on the street.”
The biggest reverse mortgage changes in 40 years
Coming back to the year 2020, a pair of reverse mortgage product educators related amusement and the detection of an oddly prophetic tone from some of the people interviewed for the story back in 1979. Dan Hultquist, VP of organizational development at Finance of America Reverse (FAR), said he “especially liked” Dr. Thomas Harter’s comment about how reverse mortgages were not likely to become widespread.
The comment shared by an anonymous banker concerning poor public perception of reverse mortgages was also particularly “prophetic,” Hultquist told RMD.
“Many believe this sentiment was the likely motive for the large banks leaving the reverse mortgage space,” Hultquist says. “I still hear similar negative comments about the reverse mortgage from time to time, and I’m rather bothered by them.”
To drive home his point, Hultquist paints a hypothetical scenario involving a medical patient with a treatable disease.
“Imagine for a moment a treatable disease that in 10 years has a 5% chance of a relapse that cannot be cured,” Hultquist says. “Should we regret extending a doomed patient’s life another 10 years? Should we ignore the 95% that are cured for fear that the next client will relapse? Is there no value in treating the disease if there is a small chance of failure?”
Over 40 years after this article was written, technical defaults are still seen as a failure of either the mortgage product being used, the lender or the originator, Hultquist says, which isn’t particularly representative of the reality in many cases.
“In reality, many borrowers that eventually default on property charges were still better off having obtained the reverse mortgage product,” he says.
Another lingering aspect of reverse mortgage product reputation centers on Mr. Haynes’ caution related to foreclosures, which is somewhat mitigated in the modern era by the common nonrecourse feature of HECM loans, and other introduced safety features particularly after the HECM program was put into place. This is according to Shelley Giordano, founder and past chair of the Academy for Home Equity in Financial Planning at the University of Illinois at Urbana-Champaign.
“Without a doubt, the HECM non-recourse feature is a spectacular change for the industry,” Giordano tells RMD. “But unfortunately, the rest of the world has not yet caught onto that. I recently spoke with an advisor, and he still thinks that the only time you use one of these is when a borrower is desperate. He clearly doesn’t understand all the more sophisticated strategies out there, and ways to control the compounding of the debt. The HECM is a much safer version of a reverse mortgage compared with where the product was in 1979.”
Loan features as described in the 1979 article were also interesting to Hultquist, he says.
“They had 5, 7, or 10-year payouts, a balloon payment was due at the end of the term, interest rates were between 10%-10.5%, and the loan could be for up to 80% of appraised value,” Hultquist observes. “Notice also that most applicants ranged in age from their 50s to their 70s. Because they structured the loan with a set loan term, the age of the borrower becomes almost insignificant.”
Read the vintage clipping at Newspapers.com, subscription required.
