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Regulator Warns Public About Reverse Mortgages

If you watch TV during insomniac hours, you've probably caught some of the commercials for reverse mortgages. A pitchman such as Robert Wagner (who starred in an early-'80s romantic couple/detective series, "Hart to Hart") explains that reverse mortgages are a way for people age 62 or older to achieve financial security by tapping the equity in their home. The homeowners never have to make a payment (indeed, they collect money) and they can continue to live in and own their homes. That's all true, BUT there's much more to know about these highly complicated and often very expensive forms of credit. And yesterday, one of the government's banking regulators, Comptroller of the Currency, John C. Dugan, warned that tougher oversight may be necessary.

"While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages -- and that should set off alarm bells," Dugan said in a speech to a banking group. According to a press release from the OCC's office, 90 percent of all reverse mortgages are insured by the Federal Housing Administration. Dugan said closer federal oversight may be necessary to protect the FHA as well as individual homeowners.

Basically, a reverse mortgage allows a senior who owns a paid-off home (or who has only a small mortgage balance remaining) to set up a line of credit against their home equity. The homeowner can choose to receive a big sum of money upfront, monthly checks to supplement income, and/or establish a line of credit.

Over time, their indebtedness increases, but they don't have to make any payments. The need to repay the loan is only triggered once the owners die, move out of the home, fail to pay property taxes or allow the home to fall into disrepair. The homeowners are guaranteed never to owe more than their home is worth.

Typically, after the elderly homeowner dies or moves into some sort of assisted-living arrangement, the house is sold to pay off the debt accumulated through the reverse mortgage and heirs receive any money that's left.

Under the right circumstances, a reverse mortgage can be a fine way for the elderly to remain in the homes and neighborhoods they love, while using their equity to make needed repairs, keep up with rising property taxes or to supplement their monthly cash flow. But, much like the first mile of a taxi ride comes with an expensive base fare, reverse mortgages carry big fees which are added to the indebtedness tab right at the start. So for the first few years these are quite expensive financial tools. Over time the benefits outpace the big start-up fees.

But consider these elements of risk: Elderly homeowners, (a group that frequently has been targeted by financial scammers), large pots of home equity, confusing financial/legal documents, big up-front fees, and the potential for profit. There is plenty of opportunity for things to go wrong.

Here's more from the OCC's statement:

"The ability of consumers to access their home equity through immediate and large lump sum payments can pose substantial risks. For example, lenders may simultaneously and aggressively market investment, insurance, or annuity products or, worse, attempt to condition loan approval on the purchase of such products. Likewise, with access to large lump sums upon closing, elderly borrowers can be particularly vulnerable to coercive sales of annuity and long-term care insurance products that are expensive and may not be appropriate to their needs.

"Another risk is that reverse mortgage borrowers, because they have no immediate repayment obligations, may overlook substantial fees that are attached to the loan. And consumers who spend their loan proceeds quickly or unwisely may end up short of the funds they need for home maintenance or property taxes, with disastrous consequences: The failure to make those payments can result in foreclosure."

One change that may be coming, according to Dugan, are escrows for property taxes and insurance.

What do you think? Do the regulators need to crack down on reverse mortgages?

By Elizabeth Razzi  |  June 9, 2009; 9:06 AM ET
Categories:  Foreclosure , Insurance , Mortgages  
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Comments

HUD Reverse Mortgages are highly regulated. Fees charged to borrowers are limited by HUD (the largest of which is HUD's charge, not the lenders'), and all borrowers must attend mandatory HUD counseling prior to getting one. When used properly they are great tools for retirement planning.

Of course unethical things can occur in most industries. For example, it normally does not benefit a retired homeowner to place reverse mortgage proceeds into an annuity (there may be exceptions to this). Additional oversite could be helpful, but not if it results in over regulation that could work to limit access to this important tool.

Posted by: lancejackson | June 9, 2009 3:10 PM | Report abuse

The OCC and Comptroller Dugan are proposing good ideas. Cross-selling restrictions are already law in part as a result of the Sen. Claire McCaskill hearings from last year, and as a resource for senior citizens we support good counseling and considerations around escrow. In the spirit of these suggestions, one of our most popular pages – the “Don’t page” – helps seniors understand when a reverse mortgage is the wrong choice: http://www.goldengateway.com/advice/makes-sense.do. And through the industry’s premier calculator we provide an apples-to-apples comparison of loans and detailed costs to help seniors avoid many of the lender pressures alluded to by Mr. Dugan: http://www.goldengateway.com/dothemath/trmcc/step1.do.

But it’s also important that regulators don’t scare people off of a product that can be everything from a lifeline for some to just a savvy financial move for others. Reverse mortgages can save a senior’s home when no other recourse is available to them. The comparison to sub prime loans was unfortunate, yet we support any responsible guidelines that provide seniors and consumers with even more protections.

Eric Bachman

Posted by: heidiv1 | June 9, 2009 7:05 PM | Report abuse

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