A reverse mortgage is a loan against the borrower’s home that the borrower does not need to repay for as long as the borrower meets certain conditions. These conditions, among others, require that borrowers live in the home, pay property taxes and homeowners’ insurance, maintain the property, and retain the title in the borrower’s name. Reverse mortgages typically are “rising debt, falling equity” loans, in which the loan balance increases and the home equity decreases over time. As the borrower receives payments from the lender, the lender adds the principal and interest to the loan balance, reducing the homeowner’s equity. This is the opposite of what happens in forward mortgages, which are characterized as “falling debt, rising equity” loans. With forward mortgages, monthly loan payments made to the lender add to the borrower’s home equity and decrease the loan balance (see fig. 1). There are two primary types of reverse mortgages, HECMs and proprietary reverse mortgages. The Housing and Community Development Act of 1987 (P.L. 100-242) authorized HUD to insure reverse mortgages and established the HECM program. According to industry officials, HECMs account for more than 90 percent of the market for reverse mortgages. Homeowners aged 62 or older with a significant amount of home equity are eligible, as long as they live in the house as the principal residence, are not delinquent on any federal debt, and live in a single-family residence. If the borrower has any remaining balance on a forward mortgage, this generally must be paid off first (typically, taken up-front from the reverse mortgage). In addition, the condition of the house must meet HUD’s minimum property standards, but a portion of the HECM can be set aside for required repairs. The borrower makes no monthly payments, and there are no income or credit requirements to qualify for the mortgage. Lenders have offered non-HECM, or proprietary, reverse mortgages in the past, but these products have largely disappeared from the marketplace due, in part, to the lack of a secondary market for these mortgages. Typically, proprietary reverse mortgages have had higher loan limits than HECMs but paid out a lower percentage of the home value to borrowers. The volume of HECMs made annually has grown from 157 loans in fiscal year 1990 to more than 112,000 loans in fiscal year 2008. The HECM program has experienced substantial growth, as the number of HECMs insured by FHA has nearly tripled since 2005 (see fig. 2). Additionally, the potential liability of loans insured by FHA has doubled in the last 2 years (see fig. 3). The potential liability is the sum of the maximum claim amounts for all active HECMs since the program’s inception. Finally, recent years have seen a rapid increase in the number of lenders participating in the HECM program (see fig. 4). However, the bulk of HECM business is concentrated among a relatively small percentage of lenders. In fiscal year 2008, roughly 80 percent of all HECMs were originated by fewer than 300 lenders, or about 10 percent of HECM lenders. Lenders can participate in the HECM market through wholesale or retail channels. Wholesale lenders fund loans originated by other entities, including mortgage brokers and loan correspondents. Retail lenders originate, underwrite, and close loans without reliance on brokers or loan correspondents. Most lenders participate in the HECM market through retail lending, although some participate through the wholesale process, and a few have both a retail and wholesale HECM business. There is a secondary market for HECMs, as most lenders prefer not to hold the loans on their balance sheets. Fannie Mae has purchased 90 percent of HECM loans and holds them in its portfolio. In 2007, Ginnie Mae developed and implemented a HECM Mortgage Backed Security product, in which Ginnie Mae-approved issuers pool and securitize a small proportion of HECMs. Fannie Mae and Ginnie Mae’s involvement in the HECM secondary market helps to provide liquidity so that lenders can continue offering HECM loans to seniors. The amount of loan funds available to the borrower is determined by several factors (see fig. 5). First, the loan amount is based on the “maximum claim amount,” which is the highest sum that HUD will pay to a lender for an insurance claim on a particular property. It is determined by the lesser of the appraised home value or the HECM loan limit. In the past year, Congress has raised the HUD loan limit for HECMs twice: HERA established for the first time a national limit for HECMs, which was set at $417,000. As a result of ARRA, the national limit was raised again to $625,500 through December 31, 2009. Prior to HERA, the loan limit for HECMs varied by location and generally were set at 95 percent of the local area median house price. Second, to manage its insurance risk, HUD limits the loan funds available to the borrower by applying a “principal limit factor” to the maximum claim amount. HUD developed a principal limit factor table using assumptions about loan termination rates—which are influenced by borrower mortality and move-out rates—and long-term house price appreciation rates, and indexed the table by (1) the borrower’s age and (2) the expected interest rate—the 10-Year Treasury rate plus the lender’s margin. The lender determines which factor to use by inputting the borrower’s current age and the current interest rate information. The older the borrower, the higher the loan amount; the greater the expected interest rate of the loan, the smaller the loan amount. Third, the funds available to the borrower are further reduced by a required servicing fee set-aside and by the up-front costs (which include a mortgage insurance premium and the origination fee), because borrowers can choose to finance them. HUD allows lenders to charge up to $35 as a monthly HECM servicing fee. The lender calculates the servicing fee set- aside by determining the total net present value of the monthly charged servicing fees that the borrower would pay between loan origination and when the borrower reaches age 100. The set-aside limits the loan funds available but is not added to the loan balance at origination. If borrowers choose to finance up-front costs as part of the loan, the loan funds available are reduced by these costs. 10 yr. Borrowers incur various costs when obtaining a HECM. HUD allows borrowers to finance both up-front and long-term costs through the loan, which means they are added to the loan balance. Origination fee: Prior to HERA, HECM borrowers were charged an origination fee equal to 2 percent of the maximum claim amount with a minimum fee of $2,000. Since the implementation of HERA, HECM borrowers are charged an origination fee calculated as 2 percent of the maximum claim amount up to $200,000 plus 1 percent of the maximum claim amount over $200,000, with a maximum fee of $6,000 and a minimum fee of $2,500. Mortgage insurance premium: Borrowers are charged an up-front mortgage insurance premium equal to 2 percent of the maximum claim amount. While the maximum claim amount is always higher than the initial amount a borrower can receive in HECM payments from the lender, FHA charges the mortgage insurance premium based on this amount because the loan balance (with accumulated interest and fees) could exceed the amount a borrower receives in payments and potentially reach the maximum claim amount. Additionally, borrowers are charged a monthly mortgage insurance premium on their loan balance at an annual rate of 0.5 percent. Interest: Borrowers are charged interest, which generally includes a base interest rate plus a fixed lender margin rate, on the loan balance. Lenders can offer HECMs with fixed, annually adjustable, or monthly adjustable base interest rates. The adjustable rates can be tied to either the 1-Year Constant Maturity Treasury Rate or 1-Year London Interbank Offered Rate Index. Most HECMs have adjustable interest rates. HECM counseling fee: The HECM program requires prospective borrowers to receive counseling to ensure an understanding of the loan. HUD allows counseling providers to charge borrowers up to $125 for HECM counseling. Loan servicing fee: Borrowers pay a monthly servicing fee of up to $35. Closing costs: HECMs also have other up-front closing costs, such as appraisal and title search fees. FHA’s insurance for HECMs protects borrowers and lenders in four ways. First, lenders can provide borrowers with higher loan amounts than they could without the insurance. Second, when the borrower is required to repay the loan to the lender, if the proceeds from the sale of the home do not cover the loan balance, FHA will pay the lender the difference. Third, if the lender is unable to make payments to the borrower, FHA will assume responsibility for making these payments. Fourth, if the loan balance reaches 98 percent of the maximum claim amount, the lender may assign the loan to FHA and FHA will continue making payments to the borrower if the borrower has remaining funds in a line of credit or still is receiving monthly payments. To cover expected insurance claims, FHA charges borrowers insurance premiums, which go into an insurance fund. HECM loans originated since the inception of the program through 2008 are supported by FHA’s General Insurance and Special Risk Insurance Fund, which includes a number of FHA mortgage insurance programs for single- family and multifamily housing and hospitals.