Order Code RL33843
Reverse Mortgages: Background and Issues
January 26, 2007
Bruce E. Foote
Analyst in Housing
Domestic Social Policy Division

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Reverse Mortgages: Background and Issues
Summary
Since the 1970s, parties have sought to create mortgage instruments that would
enable elderly homeowners to obtain loans to convert their equity into income, while
providing that no repayments would be due for a specified period or, ideally, for the
lifetime of the borrower. These instruments have been referred to as reverse
mortgages, reverse annuity mortgages, and home equity conversion loans.
Reverse mortgages are the opposite of traditional mortgages in the sense that the
borrower receives payments from the lender instead of making such payments to the
lender. Reverse mortgages are designed to enable elderly homeowners to remain in
their homes while using the equity in their homes as a form of income.
In general, reverse mortgages may take one of two forms — term or tenure.
Under a term reverse mortgage, the borrower is provided with income for a specified
period. Under a tenure reverse mortgage, the borrower is provided with income for
as long as he or she continues to occupy the property.
For borrowers, the most risky reverse mortgage is the term reverse mortgage.
Borrowers have been reluctant to enter such mortgages because at the end of the loan
term the borrower would likely have to sell the home and move.
For lenders, the most risky reverse mortgage is the tenure reverse mortgage.
Lenders have been reluctant to originate such mortgages because the borrower is
guaranteed lifetime income and lifetime occupancy of the home. This is risky because
the mortgage debt grows over time, and the debt could exceed the value of the home
if the borrower lives longer than his or her life expectancy. The use of tenure reverse
mortgages has grown in recent years due to the availability of an FHA-insured
reverse mortgage. Under the FHA program, the risk of the borrower living too long
is shifted to the federal government.
At present, the three major reverse mortgage products are the FHA-insured
reverse mortgage, the Fannie Mae reverse mortgage, and a proprietary plan from a
private lender. In most cases, the FHA program provides higher cash benefits to the
borrower than the private plans; it is the one most borrowers choose.
Currently, FHA-insured reverse mortgages are subject to the FHA loan limit for
the area in which a property is located, and these limits vary according to the median
home prices in the area. An issue for policymakers is whether to have a national
reverse mortgage limit under the FHA program instead of having the limit vary
according to the area FHA loan limit.
This report will be updated as deemed necessary in response to changes in law
or regulation.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Evolution of Reverse Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Sale-Leaseback Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Reverse Annuity Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Reverse Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Current Reverse Mortgage Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Home Equity Conversion Mortgage Program (HECM) . . . . . . . . . . . . . 7
The Home Keeper Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Cash Account Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Lifestyle Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Choosing Among the Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Using Reverse Mortgages for Long-term Care . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Funding Long-term Care Directly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Funding Long-term Care Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Issues for the Elderly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Downsizing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Selling and Renting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Finding Tenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Reverse Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Issues for Policymakers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Potential Federal Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
National HECM Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Long-term Care Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Number of HECM Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Aging in Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
List of Tables
Table 1. Comparison of Monthly Reverse Annuity Mortgage Benefits . . . . . . . . 4
Table 2. Payment Options Under a $100,000 Term Reverse Mortgage . . . . . . . . 7
Table 3. Payment Options Under Reverse Mortgage Programs by Age
of Youngest Homeowner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table 4. Comparison of Reverse Mortgage Benefits to a Homeowner
in Albany, NY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Table 5. Comparison of Reverse Mortgage Benefits to a Homeowner
in Glendale, CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Table 6. HECM Loans by Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Table 7. Potential Federal Liability Under the HECM . . . . . . . . . . . . . . . . . . . . 20
Table 8. Comparison of HECM Payments
in Low-Cost and High-Cost Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

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Reverse Mortgages:
Background and Issues
Introduction
According to the American Housing Survey (AHS), nearly 25 million American
homeowners have no mortgage debt, and more than 12.5 million of them are elderly
(age 65 or older).1 For many of the elderly homeowners, the equity in their homes
represents their largest asset. The AHS finds that the median value of these
unmortgaged homes is $127,959.
Many elderly homeowners find that while inflation has increased the value of
their homes, it has also eroded the purchasing power of their fixed incomes. They
find it increasingly difficult to maintain their homes while also paying for needed
food, medical, and other expenses. Because of their low incomes, many may be
unable to qualify for loans to pay for unexpected expenses. “House rich and cash
poor” is the phrase often used to describe their dilemma. One option is to sell the
home and move to rental housing or purchase a lower-cost home. For a variety of
reasons, however, many older Americans prefer to remain in the homes in which they
may have spent most of their working years.
Since the 1970s, academics and housing advocates have sought to create
mortgage instruments that would enable elderly homeowners to obtain loans to
convert their equity into income, while providing that no repayments would be due
for a specified period or, ideally, for the lifetime of the borrower. These instruments
have been referred to as reverse mortgages, reverse annuity mortgages, and home
equity conversion loans.
Generally, when a borrower obtains a mortgage, a lender advances a lump-sum
payment to or on behalf of the borrower, and the borrower becomes committed to
making a stream of monthly payments to repay the loan. With the reverse mortgage,
the lender becomes committed to making a stream of payments to the borrower, and
such payments are repaid to the lender in a lump sum at some future date. Thus,
reverse mortgages are the opposite of traditional mortgages in that the borrower
receives payments from the lender instead of making such payments to the lender.
Reverse mortgages are designed to enable elderly homeowners to remain in their
homes while using the equity in their homes as a form of income.
1 American Housing Survey for the United States:2005, Current Housing Reports. H150/05.
U.S. Department of Housing and Urban Development and U.S. Census Bureau. August
2006, p. 156.

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CRS-2
While reverse mortgages are a small part of the total mortgage market, their use
has increased substantially in recent years. This report discusses the evolution and
history of reverse mortgages, compares reverse mortgage products currently
available, discusses the potential use of reverse mortgages as a way to finance long-
term care, and raises a number of issues for policymakers and the elderly.
The Evolution of Reverse Mortgages
Sale-Leaseback Transactions
Under a sale-leaseback transaction a property is sold to a buyer who
simultaneously leases the property to the seller. Often, sale-leaseback transactions
are used by businesses that seek to raise working capital by selling and leasing back
some property that is used in the trade or business. The technique enables firms to
raise capital and avoid high borrowing costs. Capital that was formerly frozen in real
estate assets can be used to generate a higher rate of return in the business itself. If
the business obtained a mortgage against the property, the mortgage would cover
only 75 to 80% of the market value of the property. Through the sale-leaseback
transaction, the business can obtain cash for 100% of the value of the property (less
transaction costs) and still maintain use and possession of the property.

In the 1970s, some advocates suggested sale-leaseback transactions as a way
for elderly homeowners to convert the equity in their homes into a source of income.
Under this plan, the elderly homeowner would sell the home and lease it back from
the new owner. The seller could retain the right of occupancy for life or for a fixed
number of years. In either case the seller would become a renter of the home which
he or she formerly owned.
The burden of property taxes, home insurance, and repair and maintenance costs
would rest with the new owner. It is argued that these costs make it difficult for
elderly homeowners to remain in their homes or cause them to make trade-offs
between making home repairs and taking care of necessities such as food and health
care. Such trade-offs may result in the elderly having owner-occupied but
substandard property. Under a sale-leaseback plan, the owner/investor would be
paying the operating costs of the property and be eligible for the associated tax write-
offs. Proponents hold that the elderly would remain in well-maintained homes
without the financial burden of such maintenance.
The sale-leaseback plan is a complicated form of equity conversion because of
the number of variables that must be negotiated between the buyer and seller. The
parties must negotiate the sales price, downpayment, loan term, and lease agreement.
The items are interrelated and may affect the net benefit of the transaction to the
elderly homeowner.
A few programs were initiated. Under the so-called “Grannie Mae” program, a
company would arrange for the children or grandchildren to purchase and leaseback

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CRS-3
the home of the elderly person.2 Under another plan, the Fouratt Senior Citizen
Equity Plan, the leaseback payments took two forms: a promissory note (mortgage)
and a deferred annuity.3 The promissory note would provide for monthly payments
to the seller over a term equal to the greater of the seller’s life expectancy or 10 years.
When the payments from the promissory note ended, the annuity would make the
same payments for the lifetime of the seller.
Only three Grannie Mae loans were made. There was interest in the Fouratt
program but no loans were ever made. Sale-leaseback transactions are still being
suggested as an option for elderly homeowners. Data are not available on whether
homeowners are choosing that option.
Reverse Annuity Mortgage
The reverse annuity mortgage is another concept that was suggested in the 1970s
by advocates of reverse mortgages. Under a reverse annuity mortgage (RAM), equity
in the home is used as security for a loan. An annuity is purchased with the loan
proceeds and the borrower receives monthly annuity income, less mortgage interest.
The borrower pays only interest on the loan — repayment of the principal is deferred
until the death of the owner, the sale of the property, or some prescribed date.
Table 1 shows the net annuity that would be available under a RAM to a female
homeowner for a range of ages and interest rates. The age shown is the borrower’s
age when the loan was taken. It is assumed that a borrower obtains a $200,000
interest-only mortgage on the property and uses the proceeds to purchase an annuity.
That means that the loan balance will always be $200,000. Upon the death of the
borrower, the sale of the property, or some prescribed date, the borrower or the
borrower’s heirs would owe the lender $200,000. For a 55-year-old borrower the
annuity would be $1,062 monthly. If interest rates are 5%, the lender would deduct
$833 from the annuity and forward the borrower a net annuity of $229. If interest
rates are 12%, the interest payment would be greater than the annuity payments so
the borrower would owe the lender $938 (a net annuity of $-938). This would defeat
the purpose of entering into a RAM.
The table shows that rising interest rates are a risk for homeowners and that the
interest rate risk is greater for younger borrowers. For 55 and 60-year-old borrowers,
the net annuity would become negative when interest rates are at 7% or higher. The
net annuity would become negative at 8% for 65-year-olds, 9% for 70-year-olds, 10%
for 75-year-olds, and 12% for 80-year olds. But RAMs may become a bad financial
choice long before the net annuity becomes negative. For example, the net annuity
becomes negative at 9% for a 70-year old, but would it make economic sense for a
70-year-old to mortgage the home and only receive a net income of $380 monthly
when interest rates are 6%?
2 Q and A on Grannie Mae, Home Equity News, National Center for Home Equity
Conversion, No 8, June 1984, p 3.
3 Sloan, Katrinka Smith. New Developments in Home Equity Conversion. The Real Estate
Finance Journal. V3, Issue 4, March 1988, p 44.

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CRS-4
Table 1. Comparison of
Monthly Reverse Annuity Mortgage Benefits
Age of Homeowner
55
60
65
70
75
80
Gross Annuitya
$1,062
$1,114
$1,243
$1,380
$1,611
$1,937
Less Interest:b
at 5%
833
833
833
833
833
833
Net Annuity
229
281
410
547
778
1,104
at 6%
1,000
1,000
1,000
1,000
1,000
1,000
Net Annuity
62
114
243
380
611
937
at 7%
1,167
1,167
1,167
1,167 1,167
1,167
Net Annuity
-105
-53
76
213
444
770
at 8%
1,333
1,333
1,333
1,333
1,333
1,333
Net Annuity
-271
-219
-90
47
278
604
at 9%
1,500
1,500
1,500
1,500
1,500
1,500
Net Annuity
-438
-386
— 257
-120
111
437
at 10%
1,667
1,667
1,667
1,667
1,667
1,667
Net Annuity
-605
-553
-424
-287
-56
270
at 11%
1,833
1,833
1,833
1,833
1,833
1,833
Net Annuity
-771
-719
-590
-453
-222
104
at 12%
2,000
2,000
2,000
2,000
2,000
2,000
Net Annuity
-938
-886
-757
-620
-389
-63
Source: Calculations by CRS using annuities generated at [http://www.immediateannuities.com].
a. Monthly payment to a female on a $200,000 immediate annuity.
b. Monthly interest due on a $200,000 interest-only mortgage.
For the homeowner, another risk of the RAM is that the borrower may die too
soon. Suppose a 75-year old female obtained a RAM and died after receiving 12
payments. The estate would owe $200,000, even though the owner only received
$19,332 in gross benefits. Of course the owner could have purchased an annuity with
a 10 years certain option or cash refund option. The 10 years certain option provides
that if the annuitant lives less than ten years after the plan is issued, the payments
would continue to the beneficiary’s estate until the 10-year period is completed. The
cash refund option provides that if the total payments to the annuitant are less than
the original premium (in this example, $200,000) the beneficiary would receive the

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CRS-5
balance in a lump sum. These options reduce the monthly annuity payments and
thereby reduce the financial viability of the RAM.
Under RAMs, the risks for lenders are that the owner may live too long
(mortality risk). The purchase of the annuity shifts the mortality risk to an insurance
company.
Though the concept appeared promising, CRS is aware of only one program that
offered RAMs, though they were not marketed as such. In the 1990s, Homefirst, a
subsidiary of Transamerica Corporation, offered a reverse mortgage plan in many
parts of the country. Under the so-called “Lifetime” plan the borrower would
receive monthly loan advances for a specified number of years. A deferred annuity
was purchased from Metropolitan Life Insurance Company on behalf of the
borrower, and it would begin lifetime monthly annuity payments once the borrower
received the last loan advance. The borrower would receive lifetime income
regardless of whether they continued to occupy the property.
By the late 1990s, there were several complaints regarding the reverse
mortgages from Homefirst. An extreme example is illustrated by the case of a New
York woman. She took out a reverse mortgage and received loan advances until she
died after receiving 32 monthly payments. When her home was sold a few months
later, Financial Freedom (Homefirst) demanded more than $765,000 as repayment
under the terms of the reverse mortgage. The monthly payments she had received
during the life of the loan totaled about $58,000.4
As a result of this case and similar cases, three class action lawsuits were filed
against Transamerica HomeFirst, Inc., Transamerica Corporation, Metropolitan Life
Insurance Company, and Financial Freedom Senior Funding Corporation. The cases
were combined and settled before a single judge in the Superior Court of California
in San Mateo County under Judicial Council Coordination Proceeding No. 4061.
The above example illustrates the risks to borrowers and lenders of reverse
annuity mortgages. Financial Freedom no longer offers the “Lifetime Plan.” Instead,
it offers the “Cash Account Plan” as a proprietary reverse mortgage product, and that
plan is discussed in a section below.
Reverse Mortgage
In general, reverse mortgages may take one of two forms — term or tenure.
Under term reverse mortgages the borrower is provided with income for a specified
period. Under tenure reverse mortgage the borrower is provided with income for as
long as they continue to occupy the property.
From the lender’s perspective, reverse mortgages are deferred-payment loans.
The lender makes a stream of payments (or a lump-sum payment) to the homeowner
and expects repayment at some future date. The repayment is predicated upon the
4 Kenneth R. Harney, “Settlement Shows How Costly Reverse Mortgages Can Be,”
Washington Post, Feb. 8, 2003, p. H3.

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CRS-6
sale of the home at some price which exceeds the debt that has accumulated against
the home.
The largest risk the lender faces is the risk that over time the outstanding debt
may grow to be greater than the property value. This may be referred to as collateral
risk. Collateral risk is partly determined by the type of reverse mortgage. The least
risky reverse mortgage is the term reverse mortgage under which payments stop after
a specified number of years. Payments to the homeowner are calculated so that the
loan reaches a target balance at the predetermined period. That target balance is less
than 100% of the property value when the loan was originated. As long as the
property has not depreciated during the period, the lender is assured that sale of the
property will provide sufficient funds to repay the loan.
For lenders, the most risky reverse mortgage is the tenure reverse mortgage
because the borrower is guaranteed lifetime income and lifetime occupancy of the
home. In this case, the collateral risk may be significant if the age of entry is too low,
if property appreciation rates are overestimated, or if occupant survival rates are
underestimated.
In general, prior to the 1990s lenders were only willing to make term reverse
mortgages. The payment options under these term reverse mortgages are relatively
easy to calculate — all that is needed is the interest rate, the term of the loan, and the
end-of-term loan balance. With these factors it is a simple matter to calculate the
monthly payment that would cause the loan balance to grow to the specified amount
over the specified term. As shown in Table 2 for example, the monthly payment to
a homeowner seeking a $100,000 reverse mortgage at a 6.5% interest rate would be
$594 for a 10-year term, $943 for a seven-year term, $1,415 for a five-year term, and
$2,523 for a three-year term. Table 2 also shows the maximum cash advance that
will grow to a loan balance of $100,000 over the given terms.
The age of the homeowner is not a factor in term reverse mortgages,
homeowners would receive the same income regardless of age. If the owner lives
longer than the loan term, the home would have to be sold to pay off the debt.
This feature, however, made term reverse mortgages unattractive to
homeowners who faced the prospect of having to sell their homes at a specified date,
and to lenders who faced the prospect of risking their reputations by forcing such
sales. For these reasons there have been few takers for term reverse mortgages.

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CRS-7
Table 2. Payment Options
Under a $100,000 Term Reverse Mortgagea

Loan Term
Monthly Payments ($)
Cash Advance ($)
10 years
594
52,296
7 years
943
63,523
5 years
1,415
72,316
3 years
2,523
82,327
Source: Calculations by CRS.
a. This example assumes that the interest rate is fixed at 6.5% and that there are no transaction costs.
Current Reverse Mortgage Plans
Over time three major reverse mortgage products that offer lifetime occupancy
to the borrowers have become available to consumers in the U.S. They are the Home
Equity Conversion Mortgage Program (HECM), the Home Keeper reverse mortgage,
and the Cash Account Plan. In late 2006, the Lifestyle Plan was introduced in the
states of California, Oregon, and Washington, and the plan is expected to be made
available nationally during 2007.
The HECM, Home Keeper, and Cash Account plan all provide the borrower
with lifetime occupancy of the home — “tenure” reverse mortgages. The availability
of tenure reverse mortgages is likely the cause of the dramatic growth of reverse
mortgages in the past few years.
These tenure reverse mortgages also provide the borrower with flexibility on
how the income from the mortgage is received. A borrower may receive monthly
payments as long as the property is occupied by the borrower. The borrower may
receive a line of credit which grows at some specified annual rate and upon which the
borrower may make draws as needed. The borrower may choose to receive a large
up-front cash advance. Or the borrower may choose any combination of the above,
such as a smaller cash advance, a line of credit, and monthly income.
The following sections discuss and compare these existing reverse mortgage
products.
The Home Equity Conversion Mortgage Program (HECM)
The Housing and Community Development Act of 1987 (P.L. 100-242)
authorized the Home Equity Conversion Mortgage Program (HECM) in the
Department of Housing and Urban Development (HUD) as a demonstration program.
It was the first nationwide reverse mortgage program which offered the possibility

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CRS-8
of lifetime occupancy to elderly homeowners.5 As noted above, such mortgages are
referred to as tenure reverse mortgages. The borrowers must be elderly homeowners
who own and occupy their homes.6 The interest rate on the loan may be fixed or
adjustable.7 The homeowner and the lender may agree to share in any future
appreciation in the value of the property.8 The program has been made permanent and
the law was amended to permit its use for 1- to 4- family residences if the owner
occupies one of the units.9
The borrower can choose from five payment plans:
! Tenure - equal monthly payments as long as at least one borrower
lives and continues to occupy the property as a principal residence.
! Term - equal monthly payments for a fixed period of months
selected by the borrower.
! Line of Credit - installments at times and in amount of borrower’s
choosing until the line of credit is exhausted.
! Modified Tenure - combination of line of credit with monthly
payments for as long as the borrower remains in the home.
! Modified Term - combination of line of credit with monthly
payments for a fixed period of months selected by the borrower.
The HECM statute provides that the loan may not exceed the Federal Housing
Administration (FHA) mortgage limit for the area in which the property is located.
The mortgage must be a first mortgage, which, in essence, implies that any previous
mortgage must be fully repaid either prior to the HECM or from the initial proceeds
of the HECM. Prior to obtaining a loan, borrowers must be provided with counseling
by third parties who will explain the financial implications of entering into home
equity conversion mortgages as well as explain the options, other than home equity
conversion mortgages, that may be available to elderly homeowners. To prevent
displacement of the elderly homeowners, HECMs must include terms that give the
homeowner the option of deferring repayment of the loan until the death of the
homeowner, the voluntary sale of the home, or the occurrence of some other events
as prescribed by HUD regulations. The borrowers may prepay the loans without
penalty.
Borrowers are required to purchase insurance from FHA. The insurance serves
two purposes: (1) it protects lenders from suffering losses if the final loan balance
exceeds the proceeds from the sale of a home, and (2) it continues monthly payments
to the homeowner if the lender defaults on the loan. At loan origination borrowers
5 The mortgages were not initially available in Texas because state law prohibited reverse
mortgages. Texas law has been subsequently amended to permit reverse mortgages.
6 If the property has multiple owners, the youngest owner must be at least 62 years of age.
7 Virtually all of the HECM loans are sold to the Federal National Mortgage Association
(Fannie Mae). Since lenders generally make HECM loans with the intention of selling them
to Fannie Mae, and since Fannie Mae only buys HECM loans that have adjustable rates, all
HECM loans are made with adjustable interest rates.
8 Fannie Mae will not buy HECM loans that feature equity sharing, so none are made with
this feature.
9 Section 593 of P.L. 105-276.

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CRS-9
are required to pay an upfront mortgage insurance premium (MIP) of 2% of the
maximum mortgage amount. In addition, borrowers pay an annual insurance
premium of 0.5% of the loan balance. Borrowers do not directly pay the insurance
premiums. Instead, lenders make the payments to FHA on behalf of the borrowers
and the cost of the insurance is added to the borrower’s loan balance.
A lender may choose either the assignment option or the coinsurance option
when originating the loan. Under the assignment option, HUD will collect all the
MIP and the lender may assign the loan to HUD at the point that the loan balance
equals the maximum HUD claim amount for the area. Under the coinsurance option,
the lender may keep part of the MIP and forfeit the right to assign the case to HUD.
To date, data indicate that all lenders have chosen the assignment option. By
choosing this option, effectively, lenders are shifting the collateral risk to HUD.
The American Homeownership and Economic Opportunity Act of 2000 (P.L.
106-569) amended the National Housing Act (12 USC 1715z-20) to waive the
upfront insurance premium provided that the HECM proceeds are used to pay for
long-term care insurance. To date, the regulations to implement this change have not
been finalized. A proposed rule was published in December 2004 (69 FR 70344) and
the comment period ended on February 1, 2005.
When the home is eventually sold, HUD will pay the lender the difference
between the loan balance and sales price if the sales price is the lesser of the two.
The claim paid to the lender may not exceed the lesser of (1) the appraised value of
the property when the loan was originated, or (2) the maximum HUD-insured loan
for the area.
The Federal National Mortgage Association (Fannie Mae) has been purchasing
the home equity conversion mortgages originated under the program.

The Home Keeper Mortgage
Since November 1996, Fannie Mae has also been offering its own reverse
mortgage product — the “Home Keeper Mortgage.” This is the only conventional
reverse mortgage that is available on a nationwide basis. Private lenders have
developed proprietary reverse mortgage products but they are generally only available
in a few states.
An eligible borrower must (1) be at least age 62, (2) own the home free and
clear or be able to pay off the existing debt from the proceeds of the reverse mortgage
or other funds, (3) remain in the home as a primary residence, and (4) attend a
counseling course approved by Fannie Mae. The interest rate on the loan adjusts
monthly according to changes in the one month certificate of deposit index published
by the Federal Reserve. Over the life of the loan the rate may not change by more
than 12 percentage points. The loan becomes due and payable when the borrower
dies, moves, sells the property, or otherwise transfers title. The borrowers have the
option of receiving monthly payments, a line of credit, or a combination of the two.

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CRS-10
The Home Keeper plan may also be used for home purchase. Elderly
homeowners may use the Home Keeper reverse mortgage to purchase homes that
better fit their needs. The homeowners would make a downpayment and fund the rest
of the purchase price with a reverse mortgage. It would mean no monthly mortgage
payments.
Under both programs, the homeowner must keep applicable property taxes and
hazard insurance current, and maintain the homes in good repair. The loan would
become due and payable if the homeowner fails to do either of the above.
The Cash Account Plan
Financial Freedom Senior Funding Corp., of Irvine, CA, offers the “Cash
Account Plan” as a proprietary reverse mortgage product. The Cash Account Plan is
available to seniors 62 years or older who own homes with a minimum value of
$75,000. It differs from the two products above in that it does not offer the borrowers
an option of getting monthly payments. It provides an open-end line of credit that is
available for as long as the borrower occupies the home. The borrower can draw on
the line of credit in full or part at any time; the minimum draw is $500. The unused
portion of the line of credit grows by 5% annually10. Eligible home types include
owner-occupied single-family detached, manufactured, condominium, Planned Unit
Development units, or 1- to 4-unit residences if one unit is owner-occupied.
Borrowers are required to obtain counseling from an independent counselor prior to
obtaining the loans.
A monthly servicing fee is automatically added to the loan.11 The interest rate
charged to the borrower is equal to the current six-month London Interbank Offered
Rate (LIBOR) plus 5 percentage points. The rate is adjusted semi-annually, but the
interest rate may never rise more than 6 percentage points above the initial rate.
The Cash Account Plan is available in two forms: the Standard Option and the
Zero Point Option. Under the Standard Option, a borrower pays a loan origination fee
that is equal to 2% on the first $500,000 of loan balance, 1.5% on the next $500,000,
and 1% on the balance in excess of $1 million.
Under the Zero Point Option, the borrower pays no loan origination fee.
Closing costs, including third party costs and excluding state and local taxes, will not
exceed $3,500. At closing the borrower is required to take a draw on the line of
credit, and the minimum draw at closing is 75% of the line of credit. Subsequent
draws have a minimum of $500. Full prepayment is permitted and, while there are
no prepayment penalties, partial prepayment on the initial draw is not permitted for
the first 5 years. The Zero Point Option is generally marketed to elderly homeowners
with homes valued at $450,000 or more.
10 For example, if a borrower had a $150,000 line of credit and had not drawn on it during
the year, the next year the line of credit would be $157,500.
11 No servicing fee is permitted in Illinois and Maryland.

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CRS-11
The Cash Account Plan is currently available in the District of Columbia and
24 states: Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii,
Illinois, Indiana, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New
Jersey, New York, Ohio, Oregon, Pennsylvania, Utah, Vermont, Virginia,
Washington, and Wyoming.
The Lifestyle Plan
Reverse Mortgage of America, a subsidiary of Seattle Mortgage, introduced
“The Lifestyle Plan” in late 2006. It is the first new reverse mortgage product to be
introduced in nearly a decade. Like the Cash Account Plan, the Lifestyle Plan allows
homeowners age 62 and older to use some of the equity in their homes while
continuing to live there. The product is initially available only in the states of
California, Oregon, and Washington. Reverse Mortgage of America plans to market
it to the rest of the country in early 2007.
The Lifestyle Plan product is similar to the Cash Account plan, and is designed
for owners of high value homes. The interest rate on the new Lifestyle Plan is the
six-month LIBOR Index, plus 3.6 percentage points.
Choosing Among the Plans
Table 3 compares the income that may be received under the three major plans
for the same valued home. The table shows the monthly income that would be
available if the borrower chose only to receive monthly payments, and the largest line
of credit that would be available at loan origination if the borrower chose to only
have a line of credit. The HECM plan pays the largest monthly payments and has the
largest available lines of credit. It is reasonable to assume that a rational homeowner
would choose the HECM since it provides the greatest benefit. So, why do the other
plans exist, and who chooses them?
Part of the answer lies in home values and permissible loan limits. HECM loans
have the same limits as the FHA home loan program. FHA-insured loans are limited
to 95% of the median price for an area, subject to the restriction that the loan limit
for an area may not be less than 48% nor greater than 87% of the Federal Home Loan
Mortgage Corporation (Freddie Mac) loan limit. The maximum mortgage that may
be purchased by Freddie Mac (and Fannie Mae) is set by statute and is adjusted on
January 1st of each year. The Freddie Mac/Fannie Mae loan limits are referred to as
the “conforming loan limits.” Loans in excess of the conforming loan limits are
referred to as “jumbo loans.”
For calendar year 2007 the conforming loan limit for one-family homes is set
at $417,000, so the FHA (and HECM) loan limit is set at $362,790. That is the
statutory maximum for HECMs, but the individual limits vary by area. For example,
the limit is $228,000 in Albany, NY; $213,655 in Louisville, KY; $233,700 in
Columbus, OH; and $362,790 in Los Angeles, CA and Boston, MA.

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CRS-12
Table 3. Payment Options Under Reverse Mortgage Programs
by Age of Youngest Homeownera
Reverse Mortgage Program
HECM
Home Keeper
Cash Account
Age
Monthly
Line of
Monthly
Line of
Monthly
Line of
Income
Credit
Income
Credit
Income
Credit
62
$ 557
$ 92,909
$ 206
$ 24,419
N/A
$ 58,201
65
603
98,621
255
32,485
N/A
64,401
70
696
108,865
417
57,663
N/A
76,201
75
815
119,606
632
73,093
N/A
89,001
80
983
130,881
800
89,882
N/A
94,401
85
1,242
141,942
1,051
107,912
N/A
99,401
90
1,736
152,665
1,199
119,579
N/A
104,401
Source: Calculated by CRS using the Reverse Mortgage Calculator on Financial Freedom’s website.
a. Estimates were run on January 10, 2007 and are based on a $200,000 home in Denver, CO. It is
assumed that the homeowner had no outstanding loans against the property.
Table 4 compares the benefits available under the reverse mortgage programs
for a 70-year-old homeowner in Albany, NY. At the current limits, a 70-year old
homeowner in Albany would qualify for a maximum HECM credit line of about
$125,200. Someone in Albany with a $300,000 home would qualify for a $89,648
credit line under Home Keeper or a $116,664 Cash Account credit line.12 The
HECM would appear to be the better choice for the homeowner because the funds
available from a HECM exceed the funds available from a Home Keeper or Cash
Account loan based on a higher mortgage amount. Only when an Albany
homeowner has a home valued in excess of $350,000 does the cash available from
the Cash Account plan exceed the cash available from the HECM. And only when
an Albany homeowner has a home valued at $450,000 or more does the cash
available from the Home Keeper plan exceed the cash available from the HECM.
12 This figure were calculated using the reverse mortgage calculator at
[http://www.financialfreedom.com/ReverseMortgageCalculator/].

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CRS-13
Table 4. Comparison of Reverse Mortgage Benefits to a
Homeowner in Albany, NYa
Reverse Mortgage Program
HECM
Home Keeper
Cash Account
Home
Monthly
Line of
Monthly
Line of
Monthly
Line of
Value
Incomeb
Creditb
Incomec
Creditc
Income
Credite
$200,000
$696
$108,865
$417
$57,663
N/A
$76,201
250,000
800
125,179
533
73,656
N/A
96,433
300,000
800
125,179
648
89,648
N/A
116,664
350,000
800
125,179
764
105,640
N/A
136,533
400,000
800
125,179
879
121,633
N/A
156,356
450,000
800
125,179
919
127,070
N/A
176,178
500,000
800
125,179
919
127,070
N/A
195,178
550,000
800
125,179
919
127,070
N/A
215,963
Source: Calculated by CRS using Reverse Mortgage Calculator on Financial Freedom’s website.
a. Estimates were run on January 10, 2007 and are based on a loan to a 70-year old in Albany, NY.
It is assumed that the homeowner had no outstanding loans against the property.
b. The FHA mortgage limit is $228,000 for Albany, and that determines the maximum payments
available under a reverse mortgage in the area.
c. The Fannie Mae loan limit is $417,000 and that determines the maximum payments available under
the program.
Note that under Table 4 the benefits under a HECM do not increase as the home
value increases above $250,000. That is because HECM loans are limited to the FHA
loan limit for a particular area, and that limit is $228,000 for Albany, NY.
Table 5 has been prepared using the Los Angeles area as a base. Actually,
Table 5 may be considered a proxy for any area where the FHA limit is at its current
maximum of $362,790. The table shows that the Home Keeper plan never offers
higher cash benefits to 70-year old homeowners than the HECM.
Only when home values approach $550,000 or more does the Cash Account
plan offer higher lines of credit than the HECM. That is by design. The Cash Account
was not created to compete with the HECM, but to offer reverse mortgages to
borrowers with homes valued above the HECM and Home Keeper limits.
Thus, it is not surprising that reverse mortgages made under HECM account for
about 90% of the reverse mortgages made nationwide.
One financial writer, Jane Bryant Quinn, suggests that elderly homeowners
should choose the Cash Account plan if the homeowners only plan to be borrowing

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CRS-14
for 3 or 4 years.13 The Cash Account Plan has higher interest rates than the HECM
but the HECM has higher upfront costs.14 The lower upfront costs make the Cash
Account Plan cheaper for short term loans. Quinn suggests that borrowers choose
the HECM if they expect to keep the loan for many years. If borrowers choose a loan
with a credit line, HECM will provide them with more long-term borrowing power.
Table 5. Comparison of Reverse Mortgage Benefits
to a Homeowner in Glendale, CAa
Reverse Mortgage Program
HECM
Home Keeper
Cash Account
Home
Monthly
Line of
Monthly
Line of
Monthly
Line of
Value
Incomeb
Creditb
Incomec
Creditc
Income
Credit
$200,000
$ 702
$109,815
$421
$ 58,184
N/A
$ 76,941
250,000
889
139,072
537
74,241
N/A
97,298
300,000
1,076
168,329
653
90,297
N/A
117,655
350,000
1,263
197,605
769
106,354
N/A
137,669
400,000
1,311
205,094
885
122,411
N/A
157,636
450,000
1,311
205,094
925
127,870
N/A
177,604
500,000
1,311
205,094
925
127,870
N/A
197,571
550,000
1,311
205,094
925
127,870
N/A
217,539
Source: Calculated by CRS using the Reverse Mortgage Calculator on Financial Freedom’s website.
a. Estimates were run on January 10, 2007 and are based on a loan to a 70-year old in Glendale, CA.
It is assumed that the homeowner had no outstanding loans against the property.
b. The FHA mortgage limit is $362,790 during 2007, and that determines the maximum payments
available under a reverse mortgage.
c. The Fannie Mae loan limit is $417,000 during 2007, and that determines the maximum payments
available under the program.
Using Reverse Mortgages for Long-term Care
As indicated previously, the AHS estimates that more than 12.5 million
homeowners age 65 older, have homes which are free of mortgage debt. With the
growth in the public cost of long-term care for the elderly, there has been research
and discussion of ways that elderly homeowners may use reverse mortgages to tap
this home equity and fund their own long-term care.
13 Jane Bryant Quinn. Mortgage Smarts, Newsweek, Oct. 23, 2006.
14 But the Cash Account plan is not available in all states. So this may not be an option for
some homeowners.

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CRS-15
Funding Long-term Care Directly
One option is for the homeowners to use reverse mortgages to fund long-term
care directly. Primarily this would involve paying for home modifications and in-
home care which would permit them to “age-in-place.” Under its “Use Your Home
to Stay at Home” initiative, the National Council for the Aging (NCOA) is
encouraging the use of reverse mortgages to fund long-term care. Of the nearly 28
million American households age 62 and older, NCOA has found that about 13.2
million (48%) are good candidates for a reverse mortgage. According to NCOA, an
estimated $953 billion could be available from reverse mortgages for immediate
long-term care needs and to promote aging in place15.
That $953 billion figure, however, appears to have been calculated by assuming
that the homeowners would, on average, be eligible for about $72,200 in reverse
mortgage loans and then multiplying by the 13.2 million potential reverse mortgage
candidates. In effect, that is assuming a 100% participation rate. The 2005 Annual
Housing Survey estimates that of the 17.8 million homes owned by the elderly, only
64,000, or 0.4%, have reverse mortgages.16
By using reverse mortgages, some of the elderly would be able to fund their
long-term care expenses for a number of years, and thereby delay potential entry into
the Medicaid program. It is debatable, however, whether and how much savings this
approach would provide for the Medicaid program.
The Medicaid program has the ultimate claim on the home equity of program
participants. If participants fund their care through reverse mortgages, they may use
up most or all of their equity, so there may be little or none left to be claimed by
Medicaid. There may be cases where the net cost to the Medicaid program would be
less if the participants had entered the Medicaid program earlier instead of
consuming their equity through reverse mortgages.
Funding Long-term Care Insurance
Another option is to use reverse mortgages to pay for long-term care insurance
(LTCI). As noted above, the American Homeownership and Economic Opportunity
Act of 2000 amended the National Housing Act to waive the up-front insurance
premium for HECMs, provided that the HECM proceeds are used to pay for long-
term care insurance. Regulations to implement the law have not been finalized.
The demographics of reverse mortgages and long-term care insurance do not
match for either consumers or the industry. Long-term care insurers want young
consumers. Reverse mortgage lenders want old consumers. For consumers, LTCI is
best taken at an older age when the benefits are greater, but the premiums are more
expensive. For insurers, the major risk is that the purchasers will get sick too soon
15 Stucki, Barbara R. Use Your Home to Stay at Home: Expanding the Use of Reverse
Mortgages for Long-Term Care: A Blueprint for Action, The National Council on the Aging,
January 2005, p 9.
16 op cit American Housing Survey for the United States:2005 Table 7-15, p. 460.

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CRS-16
and need long-term care before they have paid enough premiums into the insurance
fund. For reverse mortgage lenders, the major risk is that the borrower will live too
long and accumulate debt against the property which exceeds the property value. The
different risks result in different outcomes for consumers with the same profile. For
example, insurers are reluctant to provide insurance to borrowers with certain health
problems, because of the likelihood that the borrowers may need to use the insurance.
Lenders, however, will make reverse mortgages to such borrowers, because there is
less likelihood that the borrowers will occupy the property too long.
The cost of the insurance is another issue. In recent years, insurers have raised
the insurance premiums on current customers. This suggests that a homeowner who
used a reverse mortgage to purchase long-term care insurance could face the risk that
the cost of the policy could increase at some later date. That would not be a problem
if the homeowner could afford the increased cost. But if the increase were
unaffordable, the borrower would have to drop the insurance. If this occurred, it
might be possible that the borrower would still have some paid-up benefits, but the
level of coverage would be less than the borrower had planned when initially
purchasing the policy.
This creates another potential problem because HUD, in its proposed regulation,
is considering the requirement that the HECM loan be repaid within 90 days if the
LTC insurance is dropped, unless a new policy is purchased or the borrower pays the
premium that HUD has previously waived. If the homeowner is unable to obtain a
new policy or repay the premium, it is likely that the home would be sold, because
it is unlikely that the homeowner would have sufficient income to make repayments
on the debt. The homeowner would have mortgaged the home with an instrument
promising lifetime occupancy of the property, and would have used the proceeds to
purchase long-term care insurance as protection from being impoverished by the cost
of long-term care. Yet the homeowner would have to prematurely sell the home and
would have less protection from future costs of long-term care.
Issues for the Elderly
Though there has been growth in use of reverse mortgages in recent years, it is
still a relatively little used option for elderly homeowners. Many elderly homeowners
do not understand the program and are reluctant to participate. After spending many
years paying for their homes, elderly owners may not want to mortgage the property
again. There are several options to be considered17.
Downsizing
One option is to sell the home and purchase something smaller. Present law
permits a seller to exclude from taxation up to$250,000 ($500,000 for a married
couple) of the gain from sale of a home. The home must have been used as the
principal residence for two out of five years before the sale. Funds not used for the
17 This list is illustrative rather than exhaustive.

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CRS-17
new purchase could be used for investment and as a source of cash to meet future
needs.
Selling and Renting
Instead of purchasing another property the homeowner could consider renting
an apartment, perhaps in a complex designated for those 55 and older. The proceeds
from the sale of the home could be saved and invested and used for income when
needed.
Finding Tenants
Rather than sell the home, the homeowner could consider renting part of the
home to students, young couples, other retirees. The rental income would help with
ongoing expenses. In addition to the economic benefit, a rental might also provide
some companionship to the owner.
Reverse Mortgage
The homeowner might consider a reverse mortgage. As mentioned above, a
reverse mortgage enables an elderly homeowner to use the equity in the home to
receive monthly income, a line of credit, or some combination of the two.
Repayments are delayed until the home is no longer occupied as a principal
residence. Then the borrower or the heirs must repay the loan. If the home is sold
and the sales price exceeds the loan balance, the borrower or the heirs keep any
proceeds that remain.18 If the sales price is less than the loan balance, then the lender
suffers the loss. The funds received from the reverse mortgage are tax free because
the funds are considered as loan proceeds instead of income. The payments from
reverse mortgages do not affect the income or eligibility from Social Security or
Medicare. But homeowners who receive Supplemental Security Income (SSI) or
Medicaid19 might have these benefits reduced if the recipients do not spend their
entire sum received under the reverse mortgage each month.
When considering a reverse mortgage, there are several questions which should
be addressed:
! Participants may be provided with lifetime occupancy, but will
borrowers generate sufficient income to meet future health care
needs?
! Will they obtain equity conversion loans when they are too “young”
and, as a result, have limited resources from which to draw when
they are older and more frail and sick? Table 7 shows that the
younger elderly will accumulate significant debt against the homes
if they live too long.
18 Selling the home is not a requirement. The borrower or the heirs have the option of
keeping the home and obtaining a loan or using other funds to repay the reverse mortgage
debt.
19 Medi-Cal in California.

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CRS-18
! Will the “young” elderly spend the extra income on travel and
luxury consumer items?
! Should home equity conversion mechanisms be limited as last resort
options for elderly homeowners?
! Will some of the home equity be conserved?
! How would an equity conversion loan affect the homeowner’s estate
planning?
! Does the homeowner have other assets? How large is the home
equity relative to the other assets?
! Will the homeowner have any survivors?
! What is the financial position of the heirs apparent?
! Are the children of the elderly homeowner relatively well-off and
with no need to inherit the “family home” or the funds that would
result from the sale of that home?
! Alternatively, would the ultimate sale of the home result in
significant improvement in the financial position of the heirs?
! How healthy is the homeowner? What has been the individual’s
health history?
! Are large medical expenses pending? At any given age, a healthy
borrower will have a longer life expectancy than a borrower in poor
health.
! What has been the history of property appreciation in the area?
The above questions are interrelated. Their answers should help determine
whether an individual should consider a reverse mortgage, what type of loan to
consider, and at what age a reverse mortgage should be considered.
Issues for Policymakers

Potential Federal Liability
As revealed in Table 6, there has been dramatic growth in the use of HECMs
over the past few years. More than 76,300 loans were made in FY2006 compared to
little more than 157 in 1990. What does this mean for HUD, since the department
has potential liability for these loans?
As noted previously, one of the greatest risks for lenders is that the borrower
will live too long and that the loan balance will exceed the home value — collateral
risk. Under the HECM program this risk falls to HUD because the lender can assign
the loan to HUD in those cases. The collateral risk then becomes a potential liability
for the FHA insurance fund.

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CRS-19
Table 6. HECM Loans by Fiscal Year
Fiscal Year
Number of HECM
Percent Change
Loans
(%)
1990
157
1991
389
148
1992
1,019
162
1993
1,964
93
1994
3,365
71
1995
4,165
24
1996
3,596
-14
1997
5,208
45
1998
7,896
52
1999
7,982
1
2000
6,640a
-17
2001
7,781
17
2002
13,049
68
2003
18,097b
39
2004
37,829
109
2005
43,131
14
2006
76,351
77
Source: Data from HUD. Year-to-year percentage change calculated by CRS.
a. HECMs could not be made for part of FY2000 (July to early October 2000) because FHA
insurance authority had been exhausted temporarily.
b. HUD ran out of insurance authority and couldn’t insure HECMs during the last two weeks
of September 2003.
Table 7 presents the potential FHA liability for different scenarios. The
life expectancy is the average number of years a person is expected to live,
given that they have reached a specific age. Column 1 is the monthly income
to a borrower of various ages obtaining a HECM in Denver on a home valued
at $200,000. Column 4 is the loan balance that would accumulate at that life
expectancy. Column 5 show what loan balance would be accumulated if the
borrower defies the life tables and lives and occupies the home until age 95.
Column 6 shows the potential liability to HUD if the borrower survives to age
95.

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CRS-20
Table 7. Potential Federal Liability Under the HECM
Age of
Life
Monthly
Loan
Loan
Potential
Borrower
Expectancya
Paymentb
Balance at
Balance at
Liabilityd
Lifec
Age 95
(1)
(2)
(3)
(4)
(5)
(6)
62
20.7
$ 557
$289,770
$770,484
$570,484
65
18.4
603
254,038
667,025
467,025
70
14.9
696
207,616
521,190
321,190
75
11.8
815
171,811
399,693
199,693
80
9.0
983
143,759
298,385
98,385
85
6.8
1,242
125,866
209,157
9,157
90
5.0
1,736
122,690
122,690
N/A
Source: Life expectancies are from the National Center for Health Statistics. Calculations by
CRS.
a. The average number of years a person (all races, male and female) is expected live once they
have reached a specific age.
b. Monthly payment for a HECM on a $200,000 home in Denver, CO.
c. The loan balance at the life expectancy of the borrower, assuming a 6.5% interest rate.
d. The amount by which the loan balance exceeds the initial home value ($200,000), assuming
a 6.5% interest rate.
Column 5 of Table 7 may also be interpreted as the sales price (and home
value) that must be obtained at the sale of the house in order for the lender to
break even (assuming no transaction costs). If a borrower obtains a HECM at
age 62, the originally $200,000 home must be worth about $289,770 at the
borrower’s life expectancy and more than $770,000 if the borrower lives and
occupies the property to age 95. The table suggests that at the expected life of
the borrower there is little collateral risk for HUD when making HECMs to
homeowners age 70 and above. Loans to younger borrowers are more risky.
If borrowers lived to age 95 there would be significant collateral risk for
homeowners younger than 80 years old when obtaining a HECM.
The calculations in Table 7 assume that interest rates were 6.5% and stayed
that way throughout the period. That is an unreasonable assumption given the
history of interest rates over the past 30 years. It is quite likely that interest rates
will rise during a 30-year span. Rising rates would increase the potential liability
for HUD.
In any case, the table suggests that, given the interest rates, the potential
liability the government faces under the HECM program will depend on the
extent to which the program is used by borrowers age 70 and older, and the
extent to which those borrowers meet or exceed their life expectancies. HECM
loans to 62 and 65-year old homeowners could be quite risky for HUD.

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CRS-21
National HECM Limit
Some proponents of the HECM program suggest that the law should be
amended to provide a national HECM mortgage limit instead of having the limit
be subject to the area FHA limit.
For convenience, the HECM data from Table 4 and Table 5 have been
placed in Table 8. Table 8 compares the HECM benefits in low-cost and high-
cost areas. Albany, NY is being used as a proxy for low-cost areas and
Glendale, CA is used as a proxy for high-cost areas. The FHA loan limit for
one-family homes is $228,000 in Albany and it is $362,790 for Glendale.
Owners of $200,000 homes would receive nearly the same payments from
a HECM in either Albany or Glendale. Regardless of the home value, HECMs
for Albany homeowners would be limited to what may be obtained on a
$228,000 home, while homeowners in Glendale would receive larger cash
benefits based on their higher home values.20
A national HECM limit is something that Congress has considered in the
past, since P.L. 105-276 required HUD to conduct an actuarial study to
determine the adequacy of the insurance premiums collected with respect to the
establishment of a national HECM mortgage limit.21
It could be argued, however, that there is a sense in which the present
program benefits both borrowers and the government. Borrowers, whose homes
are valued above the FHA limit, are forced to conserve more equity than if they
could borrow more. This provides the possibility of larger distributions to heirs
upon the death of the borrowers, or the availability of more funds for other needs
should future illness require a sooner than expected sale of the home. For the
government it lessens the frequency and severity of future FHA insurance losses.
20 Table 4 reveals, however, that even though the owner of a $300,000 home in Albany
would get less from a HECM than a homeowner in Glendale, the Albany homeowner would
get more than would be available from the alternatives offered by the Home Keeper and
Cash Account plans.
21 12U.S.C. 1715z-20(k)(5)

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CRS-22
Table 8. Comparison of HECM Payments in Low-Cost and
High-Cost Areas
Limited HECMa
Maximum HECMb
Home
Monthly
Line of Credit
Monthly
Line of Credit
Value
Income
Income
$200,000
$696
$108,865
$702
$109,815
250,000
800
125,179
889
139,072
300,000
800
125,179
1,076
168,329
350,000
800
125,179
1,263
197,605
400,000
800
125,179
1,311
205,094
450,000
800
125,179
1,311
205,094
Source: Table 4 and Table 5.
a. HECM limited to $228,000
b. HECM limited to the $362,790 FHA maximum.
Long-term Care Insurance
As noted above, current law provides that a borrower may waive the up-
front insurance premium for HECMs, provided that the HECM proceeds are
used to pay for long-term care insurance.22
The law is very restrictive in that it requires that all the proceeds of the
HECM (after paying off any existing debt on the property) must be used
exclusively for long-term care insurance. In exchange for savings on the
insurance premium (which would be $4,000 on a $200,000 home), the
homeowner would be giving up the option of using future HECM funds to pay
for future home repairs, unexpected health costs, or increases in daily living
expenses.
This feature makes the proposal risky and unattractive to some elderly
homeowners. For this reason it has been suggested that Congress consider
modifying the legislation to make it more flexible.
Number of HECM Loans
The HECM program was begun as a demonstration program which
authorized only 2,500 loans to be made under the program (50 per state).23 The
program has been made permanent and the limit on the aggregate number of
22 12 U.S.C. 1715z-20(l)
23 12 U.S.C. 1715z-20(g)

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CRS-23
HECMs that may be insured has been amended several times. It was raised to
150,000 by P.L. 106-569, to 250,000 by P.L. 109-13, and to 275,000 by P.L.
109-289. As passed by the House in the 109th Congress, H.R. 5576 would have
removed the limit on the number of HECM loans that may be the made.
HUD and lenders are suggesting that the program is now approaching the
present 275,000 limit. If that limit is reached, then HUD may no longer insure
mortgages under the program.
As passed by the House on January 17, 2007, H.R. 391 would authorize
HUD to continue to insure HECM mortgages through February 15, 2007,
regardless of the limit contained in current law.
Aging in Place
Stephen Golant, a University of Florida professor and former consultant to
the Commission on Affordable Housing and Health Facility Needs for Seniors
in the 21st Century, suggests that the explosive growth of reverse mortgages
may backfire for both elderly homeowners and the nation’s cities.24 He suggests
that society should not romanticize the notion of older people aging in place in
their homes and be blind to the downside.
According to Golant, the downside is that reverse mortgages encourage the
elderly to remain in older housing that may be unsafe because of physical
deficiencies. Holders of reverse mortgages are disproportionately poor, they
often are in their 70s and 80s, and more likely to live alone. More than half
occupy dwellings that are at least 40 years old, which means they are more likely
to live in houses with physical deficiencies. They often do not make
improvements in their homes that could help them avoid accidents. Golant
suggests that we are doing a disservice to elderly homeowners by encouraging
them to remain in such homes. Instead, the homes could be sold to younger
homebuyers who are more likely to make improvements to the homes which
would contribute to revitalization of neighborhoods. Golant suggests that,
although the elderly may prefer to remain in their own homes, many would be
better off in places appropriate for their frailties and close to the support services
they may need.
24 Stephan M. Golant. Why Urban Mayors Should Dislike Reverse Mortgages. Paper
delivered at the 57th Annual Scientific Meeting of the Gerontological Society of America,
Washington, DC, Nov. 20, 2004.

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CRS-24
References
Ahlstrom, Alexis A, and Anne Tumlinson and Jeanne Lambrew. Primer:
Linking Reverse Mortgages and Long-term Care Insurance. The Brookings
Institution. The George Washington University
Case, Bradford and Ann B. Schnare. Preliminary Evaluation of the HECM
Reverse Mortgage Program. Journal of the American Real Estate and
Urban Economics Association; Summer 1994.
Cutler, Neal E. Homeownership and Retirement Planning: Financial Worries
and Reverse Mortgages. Journal of Financial Services Professionals, Mar
2003.
Davodoff, Thomas and Gerd Welke. Selection and Moral Hazard in the Reverse
Mortgage Market. Hass School of Business, University of California at
Berkeley, Oct 21, 2004.
Eschtruth, Andrew D., and Wie Sun and Anthony Webb. Will Reverse
Mortgages Save Baby Boomers? Boston College, Center for Retirement
Research, Issue in Brief, No 54. September 2006.
Gibler, Karen Martin and Joseph Rabianski, Elderly Interest in Home Equity
Conversion, Housing Policy Debate. V4, Issue 4, 1993.
Golant, Stephan. Housing America’s Elderly: Many Possibilities/Few Choices.
Sage, 1992.
————Why Urban Mayors Should Dislike Reverse Mortgages. Paper
delivered at the 57th Annual Scientific Meeting of the Gerontological
Society of America, Washington, DC, Nov 20, 2004.
Holt, Michael A., House Rich but Cash Poor. The CPA Journal. Pp. 70-74, Feb
1994.
Kelly, Tom. New Reverse Mortgage Formula: How to Convert Home Equity
into Tax-Free Income. John Wiley & Sons, 2005.
Klein, Linda S. and C.F. Sirmans. Financial Innovation and the Development of
Reverse Mortgage Programs. Benefits Quarterly, First Quarter 1993.
Merlis, Mark. Home Equity Conversion Mortgages and Long-term Care. Health
Policy Institute, Long-term Care Financing Project, Georgetown
University, March 2005.
Quinn, Jane Bryant. Mortgage Smarts, Newsweek, Oct. 23, 2006.
Sloan, Katrinka Smith. New Developments in Home Equity Conversion. The
Real Estate Finance Journal. V3, Issue 4, Mar 1988.

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CRS-25
Stucki, Barbara R. Use Your Home to Stay at Home: Expanding the Use of
Reverse Mortgages for Long-Term Care: A Blueprint for Action, The
National Council on the Aging, January 2005.
Symanoski, Edward J. Jr. Risk and the Home Equity Conversion Mortgage.
Journal of the American Real Estate and Urban Economics Association;
Summer 1994.
U.S. Bureau of the Census. Current Population Reports. P70-88. Net Worth and
Asset Ownership of Households: 1998 and 2000. May 2003.
U.S. Department of Health and Human Services, National Center for Health
Statistics. National Vital Statistics Reports, United States Life Tables, 2003,
V54, No 14, April 2006.
U.S. Department of Housing and Urban Development, Home Equity Conversion
Mortgages: Long Term Care Insurance; Proposed Rule, 69 FR70344. Dec
3, 2004.

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