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Reverse mortgages may be next crisis

Warning sounded on loans to seniors

By Alexis Leondis
Bloomberg News / October 7, 2009

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NEW YORK - Reverse mortgages may be the next subprime crisis, according to the National Consumer Law Center.

Some of the same US lenders that helped drive the real estate boom with loans to home buyers who could not afford the payments are now targeting senior citizens, the center said. Brokers, who are given financial incentives to sell the loans, may be making misleading claims, according to a report titled “Subprime Revisited,’’ released yesterday by the Boston-based NCLC.

“This market is designed to serve seniors, so when we find abuses cropping up and migrating from the subprime market to the senior market, that sounds an especially loud warning bell,’’ said Rick Jurgens, an advocate at the NCLC who contributed to the report.

Reverse mortgages enable people 62 and older who are looking for extra cash to use the equity in their homes and receive lump-sum payments, periodic checks, a line of credit, or a combination of the three. Lenders are repaid from the sale of the home when the borrowers die or move.

The former maximum payout for reverse mortgages backed by the Federal Housing Administration was $417,000. That limit was increased temporarily to $625,500 in February. Origination fees are capped at $6,000.

In 2008, more than 100,000 seniors used reverse mortgages to tap over $17 billion in home equity, according to the Housing and Urban Development Department.

“It’s a scary mix because you have a financial instrument that’s complicated, combined with aggressive marketing to the most vulnerable in our society,’’ said Senator Claire McCaskill, a Missouri Democrat.

Reverse mortgages can be appropriate for some seniors, yet transparency and consumer protections are needed, said Senator Herb Kohl, a Wisconsin Democrat, and chairman of the Senate Special Committee on Aging.

Kohl and McCaskill released a government report in June that said some lenders falsely market reverse mortgages as “lifetime income’’ and sell mortgages coupled with other financial products, such as annuities, even though Congress banned so-called cross-selling in 2008.

The center’s study recommended enhancing borrower counseling prior to taking out a loan and holding lenders and brokers to a suitability standard.

Criticisms of the reverse mortgage industry don’t take into account recent safeguards and enhancements such as capped fees and mandatory counseling, said Peter Bell, president of the National Reverse Mortgage Lenders Association.

Seniors who take out reverse mortgages after Oct. 1 through the FHA’s program, also known as a Home Equity Conversion Mortgage, will receive 10 percent less than they would have before Oct. 1, according to Bell. The change is to compensate for an estimated $798 million deficit from depressed home prices, Bell said.

Risks that contributed to the collapse of the subprime- mortgage market also are a concern in the sale of reverse mortgages, said John Dugan, head of the Office of the Comptroller of the Currency, at an American Bankers Association conference in June.

“While reverse mortgages can provide real benefit, they also have some of the same characteristics as the riskiest types of subprime mortgages - and that should set off alarm bells,’’ Dugan said.

HUD insured 112,015 reverse mortgages in the year that began Oct. 1, 2007, and the total was 69,493 through six months of the 2009 fiscal year, according to the OCC. The government backed 157 reverse HUD mortgages in 1990.