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Risk in Reverse Mortgages

Yesterday, in a speech to the American Bankers Association, the Comptroller of the Currency, John Dugan, suggested that the next area of concern in the mortgage market may be “reverse mortgages."

FHA: A reverse mortgage is a special type of home loan that allows homeowners to convert a portion of the equity in their homes, built up over years of mortgage payments, into cash. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower no longer uses the home as the principal residence.

The FHA is the lead vendor of these mortgages but has strict guidelines for qualification. You have to be 62 years or older, own your home outright (32 percent of Americans own their homes outright) or have a very low mortgage balance, and you have to live in the home. According to HUD figures, there are about 418,000 reverse mortgages out there today, which is less than one percent of the total mortgage market.

So what’s the concern? Mr. Dugan told the bankers group: “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.”

I was confused about this, since, as I said, most reverse mortgages are FHA, backed by the US of A, and supposedly well-scrutinized. So I called over to the OCC and spoke with an official there, who said the real concern is not so much with current FHA reverse mortgages but with the growth of the product in the non-FHA arena. As more and more seniors (and the baby boomers mean there are a lot more seniors these days) realize they have lost vast chunks of their 401Ks in the markets, they will turn to their homes for equity and to reverse mortgages. The number of reverse mortgagees has been growing steadily, with a big jump between 2006 and 2007.

Recently the Obama administration requested $798 million for the FHA's reverse mortgage program. HUD cited falling home prices as the need for the subsidy. The department estimates it will insure at least $30 billion in reverse loans under its program in 2010.

So it makes sense that the Comptroller of the Currency might be concerned. Older borrowers might be more prone to some of the misleading marketing and coercive sales tactics. “It would be a major step forward for the Department of Housing and Urban Development to issue guidelines or requirements addressing the escrow issue for home equity conversion mortgages,” said Dugan, “and I would like to begin a dialogue with them on the issue.”

When I asked HUD about Dugan’s comments, they sent me the following response:

As Mr. Dugan noted in his remarks, FHA’s HECM product already contains consumer protections relating to reverse mortgages that are not available in proprietary (non-FHA) reverse mortgage products. These protections include mandatory counseling and prohibiting the sale of annuities at the time of the mortgage transaction. These existing consumer protections have contributed greatly to the success of the HECM program, which has provided financial security to several hundred thousand seniors. We will certainly reach out to the OCC to share our insight, to ensure that the agency has accurate information on which to base any regulatory changes they plan to impose.”

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