- The Washington Times - Wednesday, October 7, 2009

Reverse mortgages could be the next subprime crisis.

Some of the same subprime lenders that helped drive the real estate boom with loans to home buyers who couldn’t afford the payments are now targeting seniors, the National Consumer Law Center warned Tuesday.

Brokers, who are given financial incentives to sell the loans, may be making misleading claims to potential customers, according to a report by 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 ages 62 and over 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 more than $17 billion in home equity, according to the Department of Housing and Urban Development.

“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 Sen. Claire McCaskill, Missouri Democrat, in a call following the report’s release.

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

Mr. Kohl and Ms. 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 before 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 in Washington.

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 Mr. Bell. The change is to compensate for an estimated $798 million deficit from depressed home prices, Mr. Bell said.

Risks that contributed to the collapse of the subprime mortgage market also are a concern in the sale of reverse mortgages, John Dugan, head of the Office of the Comptroller of the Currency, told 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,” Mr. Dugan said.

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

Wells Fargo and Bank of America are two of the biggest reverse mortgage lenders. Wells Fargo originated almost 20,000 loans and Bank of America more than 10,000 for the 12-month period ending May 31, according to the report, which cited data from Reverse Mortgage Insight, a provider of mortgage data in Aliso Viejo, Calif.

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