“People fear what they don’t understand and hate what they can’t conquer.”

Today I’ll share a story about one of the most feared loans in America that has been disparaged, slandered, misunderstood, and attacked by pundits, radio and TV hosts, financial planners, and mortgage professionals alike. Some fear the loan as if it were a twisted laboratory experiment that escaped only to roam freely to terrorize American homeowners.

The Origins of the Most-Feared Loan

Pretty scary, isn’t it? After all, it was UCLA professor Yung-Ping Chen who pioneered the idea of this most-feared financial product. What would an economist and gerontologist know anyway? Enough to speak before the Subcommittee on Housing for the Elderly of the Senate Special Committee on Aging in 1969. His ongoing research centered on the convergence of economics and gerontology and ways to reduce dependence on social assistance programs.

Mr. Chen wrote this in his column in Reverse Review.

“I believed that incidence of poverty among old people would be lower if poverty were measured using what might be called the “net-worth approach.” The net-worth approach calls for adding up all the assets, liquid and non-liquid.”

Chen added the challenge was how to not have to sell illiquid assets such as the home. This prompted him to develop the concept of a financial product that would convert a homeowner’s equity into a lifelong flow of spendable cash while remaining in the home.

A ghastly endeavor? Quite the contrary.

Then in 1975 Jack Guttentag of The Wharton School, also known as the Mortgage Professor, published an academic paper saying the loan was badly needed.

“It is also very different from, and more complex than, any existing financial instrument. It constitutes a challenge of the first magnitude to the imagination of the government, and to the ingenuity and adaptability of the private financial system”, said Guttentag.

Guttentag’s words were prophetic as the loan is often seen as complex which gave rise to the misconceptions and myths  that persist to this very day. Yet, the federal government and private lenders figured it out.

In 1981 Chen’s theory received the support of the White House Conference on Aging. Six years later a pilot program was launched under the Housing and Community Development Act. One year later the program was made a permanent fixture in FHA lending. The Home Equity Conversion Mortgage (HECM) was born.

The Godfather of the HECM

Dr. Chen was far from a Doctor Frankenstein. He was a visionary with the intellect and passion to help solve some of the most consequential problems of aging. Perhaps we could call him the godfather of reverse mortgages since he spurred the development of the only loan in the United States that doesn’t require monthly payments toward the loan’s principal balance or accrued interest while reaping the benefits of accumulated equity while living in the home.

However, 36 years after the HECM officially became an FHA-insured loan reverse mortgages remain shrouded in mystery and unnecessary confusion even by high-ranking real estate professionals.

An FHA Loan by Another Name Maligned

Case and point- a recent press release from the National Consumer Law Center on increasing measures to prevent the rise of elder real estate and financial fraud. In the release, the National Association of Realtors Vice President of Policy Advocacy Bryan Greene said, “NAR continues to advocate on behalf of seniors to shield them from exploitative tactics such as reverse mortgages, property investment, and foreclosure-rescue offers”. Wow. An FHA-insured mortgage makes the top of the list of supposed exploitative tactics. Since when did a government mortgage cease to be a loan and become a tactic?

And speaking of ‘tactics’ what about those traditional 30-year fixed-rate mortgages or 5/1 ARMs (Adjustable Rate Mortgages) sold to homeowners in their 70s and 80s? Are those not exploiting older homeowners and putting them at risk?  Not to mention, the infamous pick-a-pay loans sold to seniors in the years preceding the great housing crash of 2008. Fortunately, I was able to save a few homeowners from a looming payment shock and eventual foreclosure with a reverse mortgage at that time. Where’s the outcry we asked over a decade ago? Crickets.

However, In a league of their own are the Dave Ramseys and Suzie Ormans of the financial media universe whose bias against reverse mortgages has crossed the Rubicon from truth to stubborn opposition. To this day they opine on a loan they simply don’t know or understand, much to the disservice of their listeners and viewers.

In conclusion, the HECM is simply a mortgage with a very particular set of features. Features, while unparalleled that can create confusion and misunderstanding among homeowners, policymakers, and professionals alike.

As the author and industry expert Dan Hultquist so aptly put it, “It seems nobody wants a reverse mortgage, but everyone wants what the reverse mortgage does for them. Clearly there is a disconnect between the product and what people think about the product”.

Sadly, the reverse mortgage is the most-feared loan in America but it doesn’t have to be.