Reverse Mortgage - Historical Background
As a reaction to the excesses of Industrialization, and the since-discredited beliefs in Social Darwinism and American Exceptionalism during the Gilded Age from 1865 to 1915, there was more social legislation passed by Congress in the United States in the Twentieth Century than at any time before or since. This included child labor laws, food safety inspection, and public education. In 1913 the 16th Amendment to the Constitution was ratified which made federal personal income tax legal. Prior to this time the Federal Government got all of its revenue from tariffs and excise taxes. Now they could tax income as well and by the ‘Roaring Twenties” the government had a lot of discretionary income.
After the Great Depression began in 1929, President Roosevelt, who took office in 1933, used much of these federal funds to create programs that kept America afloat and created social safety nets to help the working classes. One piece of social legislation that would have far reaching impact was the Social Security Act of 1935 that was passed by Congress as part of the New Deal.
Social Security Needs Help
In 1936 when Social Security took effect, the average wages per person in the U.S. was under $2,000 a year, the average cost of a new house was $4,100, and, "Hey Buddy, can you spare a dime?” Then you could choose between buying a loaf of bread and a gallon of gasoline.
Also in 1936, according to the U.S. Department of Commerce, the average birth rate was about 6,000 babies a day. Less than ten years later, after World War II, that rate would double to about 12,000 a day and remain at that level for almost twenty years. This became the Baby Boomer Generation; and under the GI Bill, this generation went to school and bought homes.
By the mid 1950’s, Congress knew they had a problem on their hands. Social Security was never designed to address these kinds of birth rate numbers or inflation prices and would not provide a workable stand-alone “national pension”. Starting in 1956, Congress, working with the Internal Revenue Service, began passing social legislation that was designed to entice Americans to save money for retirement to add to their Social Security benefits. This is why IRA, Keogh and 401K retirement plans were created, because today 10,000 Baby Boomers are turning age 62 every day!
Congress Has Another Money Saving Idea
In 1969, a very smart economist from UCLA made a presentation to Congress in which he explained a way to solve the major problem about home ownership. This being that your equity wasn’t liquid when you needed it without selling the home or incurring substantial mortgage interest payments. To put it another way, how can your home equity increase your retirement income?
In 1987, Congress passed an FHA insurance bill called the Home Equity Conversion Mortgage Demonstration, which was a reverse mortgage pilot program that insured reverse mortgages. In 1988, HUD gained the authority to insure reverse mortgages through the FHA when President Ronald Reagan signed the reverse mortgage bill into law.
For over a decade, the program was designed and redesigned. One big problem that needed to be overcome was how to make the loans safe and non-recourse to the borrower. In other words, what would happen if the loan was bigger than the property value. Working with the Federal Housing Authority, an insurance fund was set up and a Mortgage Insurance Fund premium was agreed upon. This solved that last big problem.
As a result of that study, in 1998 the Home Equity Conversion Mortgage (HECM) program came into being. This program was regulated by the Federal Housing Authority but was implemented by private mortgage companies. Just like private banks and investment companies implement the IRA, Keogh and 401K plans for you.