The Home Equity Conversion Mortgage (HECM) program, administered by the Department of Housing and Urban Development's (HUD's) Federal Housing Administration (FHA), is a reverse mortgage insurance program whereby older homeowners—those age 62 and older—borrow against the equity in their homes and FHA insures lenders against potential losses associated with the loans. Unlike conventional mortgages, HECM borrowers receive payments, either periodically or in a lump sum, and the mortgages are paid off when the home is sold. If a home is sold for less than the balance of the reverse mortgage, FHA will reimburse the lender up to a maximum claim amount. Borrowers pay an up-front fee, or premium, when they enter into HECMs, and pay annual premiums based on a loan's principal balance. The HECM program came about as a demonstration in 1988. The impetus for creating a program to help older homeowners obtain reverse mortgages was to make home equity available for aging in place—particularly for homeowners with lower incomes who may otherwise have difficulty with maintenance and other expenses. Another idea was that reverse mortgage proceeds could be used to pay for long-term care expenses. Offering government insurance was also a means to encourage private lenders to enter into the reverse mortgage market. The HECM program became permanent in 1998 and has insured nearly 1 million reverse mortgages since its creation. The HECM program has faced financial difficulties in recent years, particularly since the economic downturn in 2008 and resulting declines in home values. Changes in the way HECMs are used, including increases in borrowers taking up-front lump-sum payments, also contributed to financial difficulties. A number of borrowers, having maximized their loans, faced loan default due to failure to pay property taxes and homeowner's insurance. The financial status of the program resulted in HUD making changes, including imposition of credit requirements for borrowers. In addition, HUD faced legal challenges in its regulatory interpretation of how non-borrowing spouses should be treated after the death of a borrower. As the result of a court decision, HUD has attempted to ensure that non-borrowing spouses are protected from foreclosure. This report discusses the basics of how the HECM program works, including borrower eligibility, the amount that can be borrowed, and procedures for lender claims (" Basics of the Home Equity Conversion Mortgage (HECM) "); facts about HECMs and borrowers (" What Do We Know About HECMs and Borrowers? "); current issues facing the HECM program (" What Are Current Issues Surrounding HECMs? "); and the legislative history of the HECM program (" How Did the HECM Program Come About? "). In a traditional "forward" mortgage, homeowners borrow money against the value of their homes and make monthly payments over time toward principal and interest until the mortgage is paid off. Typically forward mortgages are used to purchase homes, but homeowners may also take out second mortgages or home equity lines of credit (HELOCs) to pay for home improvements or other needs. Reverse mortgages are based on the same concept of using home equity for home maintenance and other needs, but reverse mortgages differ from forward mortgages primarily in the way that borrowers pay back the amount owed. As with HELOCs, reverse mortgage borrowers receive money based on the equity in their home, either as a lump sum or through periodic payments. But instead of making monthly payments to repay the loan balance, a borrower is to pay back the reverse mortgage, plus accumulated interest and fees, either when they move out and sell the home or when they die and the home is sold by their estate. As a result, the term of the reverse mortgage is not fixed, unlike a forward mortgage, which extends most often for 15 or 30 years. The way in which the amount of the mortgage is determined also differs. In addition to using the home's value, the borrower's age and the interest rate are used to try to ensure that the loan balance and added interest do not outstrip the home's value. Reverse mortgages are targeted to older homeowners and present an option for extra income as borrowers age. The ability to borrow against home equity may appeal to homeowners with lower monthly incomes and little savings. If a home is a borrower's primary asset, accessing home equity can help with everyday expenses, home improvements or modifications, or extraordinary costs that arise. Borrowers who already have home mortgage or other debt may also use reverse mortgages to pay down debt so they have fewer monthly expenses. In some cases reverse mortgages may help seniors who would otherwise not be able to remain in their homes to age in place while they remain physically able. HUD's HECM program offers FHA insurance for lenders that extend reverse mortgages to older homeowners, with borrowers paying the insurance fees. Reverse mortgages are made by private lenders, not the federal government, and for a time there was a market for reverse mortgages that did not involve government insurance. However, particularly since the 2008 economic downturn, nearly all reverse mortgages are insured through the HECM program. In the HECM program, HUD offers insurance to protect lenders against losses on their loans. Lenders must be approved by FHA, and the program statute and regulations determine the amount of the loans that borrowers may enter into. Borrowers pay up-front and annual insurance premiums to HUD, and if the amount of the loan exceeds the sale price at the end of its life, HUD reimburses the lender for the difference up to a maximum claim amount. (For a discussion of the maximum claim amount, see " How Much Can Be Borrowed? ") The HECM program is governed by statute and HUD regulations, but HUD may also make changes to the program via mortgagee letters. While the HECM statute uses the term "mortgagor" to refer to borrowers and "mortgagee" to refer to lenders, this report uses the terms borrower and lender, respectively. The statute governing HECMs sets out eligibility standards for both borrowers and properties. Age of Borrower: To participate in the HECM program, HUD requires homeowners to be at least 62 years of age or older. Type of Home: The home being mortgaged must be a one-to-four family residence, with the homeowner occupying one of the units as their primary residence. While most borrowers already occupy their homes, HECMs can also be used to purchase property. In the case of a purchase, a borrower must pay the difference between the HECM and purchase price with cash from sources approved by HUD. Borrower Financial Characteristics: Until recently, the HECM program did not have income or other financial requirements for borrowers because loans are repaid from home sale proceeds. However, due to the failure of approximately 10% of HECM borrowers (representing about 54,000 loans) to pay property taxes or homeowner's insurance, Congress gave HUD the authority to set financial requirements via mortgagee letter. Effective April 27, 2015, lenders must conduct a financial assessment of new HECM borrowers. Borrowers' credit histories and records in paying property charges are assessed, particularly payment of property taxes and homeowner's insurance. This requirement was made part of final regulations, issued January 19, 2017, with an effective date of September 19, 2017. The amount that can be borrowed (or principal limit) is based on the interaction of two factors: The Maximum Claim Amount (MCA) —The MCA is the lesser of a home's appraised value or the HECM loan limit for the area in which the home is located. The maximum HECM loan limit is tied to the Freddie Mac conforming loan limit. The current limit is $636,150 for a single-unit residence. Amounts are higher for properties with 2-4 units. The MCA is the maximum that HUD will pay toward a lender's claim on insurance benefits. The Principal Limit Factor (PLF) —PLFs are factors set by HUD based on borrower age, mortgage interest rate, and expected home value appreciation. The PLFs are percentages applied to the MCA to determine the principal limit (i.e., the amount that can be borrowed). The older the borrower and the lower the interest rate, the higher the PLF; PLFs do not change for ages above 90 years. For example, PLFs effective August 4, 2014, range from 0.130 (for a borrower age 62 at a 10% interest rate) to 0.750 (age 90 at a 3% interest rate). The PLF is based on the age of the youngest borrower or non-borrowing spouse, and HUD publishes separate PLFs to be used when non-borrowing spouses are under age 62. This ensures that loan amounts take into account the amount of time that both spouses are likely to remain in the home. The Principal Limit (PL) , the amount that a homeowner can borrow, is determined by multiplying the MCA and the PLF. As an example, assume a borrower who is 75 years of age and has a home valued at $200,000. The initial interest rate on the loan is 5%. The PLF in this case would be 0.614 (based on PLFs announced in August 2014), resulting in a principal limit of $122,800 ($200,000 x 0.614). The principal limit available to the borrower is reduced by any up-front fees, and, if a borrower has an existing mortgage on the property, the proceeds must be used to pay it off.