Reverse Mortgages More Risky

November 20, 2009

Reverse mortgages are becoming more risky for senior homeowners, due to the rising number of shady operators who are marketing these programs. The trend has prompted the National Consumer Law Center (NCLC) to issue a special report, "Subprime Revisited: How the Rise in the Reverse Mortgage Lending Industry Puts Older Homeowners at Risk."

Reverse mortgages are special loans, making it possible for seniors, over age 62, to receive monthly payments (loan payout segments). The loan is secured by the equity in their home. In most cases, the seniors can receive the payments for as long as they live and reside in the home. Some plans offer alternative options of taking a lump sum or a line of credit, or combinations thereof.

Costs related to obtaining such a mortgage are substantial, but a growing number of seniors are signing up for reverse mortgages. About 110,000 units are now sold annually. It’s grown into a $17 billion industry, and that attracts all kinds of companies and individuals who offer and aggressively promote the product. "In the reverse mortgage market, seniors now face some of the same aggressive lending practices that were common in the subprime lending boom," said Tara Twomey, a NCLC attorney.

Here’s a quote from the NCLC report: "Many of the same players that fueled the subprime mortgage boom – ultimately with disastrous consequences – have turned their attention to the reverse mortgage market. Lenders, including some of the nation’s largest banks, view that market as a source of profits that have dried up elsewhere. Mortgage brokers see it as a new source of fees. Predators who once reaped profits from exotic loans have now focused on wresting more wealth from vulnerable seniors," the report stated.

The report calls for the extension of protections related to all reverse mortgage and other equity conversion products aimed at seniors. It also calls for a prohibition on yield spread premiums and other perverse incentives in the reverse mortgage market. The report highlights the danger of predators who use reverse mortgages as tools in schemes to steal the home equity of unsuspecting seniors, or to fund the purchase of expensive insurance and financial products that pay high commissions.

It should be noted that a well structured reverse mortgage plan can be beneficial to some seniors. And there are capable and ethical firms and representatives offering such plans. But there are also a growing number of unethical profit-grabbers. The bottom line: study and double-check any reverse mortgage plan being considered, and compare it with several other competitive plans.

Posted in Lending, Real Estate