As first reported recently in the Orlando Sentinel, a boom in the reverse-mortgage business has become a magnet for the same profit-driven “sales culture” that caused the subprime-mortgage meltdown, according to a new consumer report.
Some lenders are targeting older homeowners with familiar weapons, including aggressive marketing and high-pressure sales tactics, according to the Boston-based National Consumer Law Center .
Although experts acknowledge the potential benefit of reverse home loans when done right, senior homeowners are more vulnerable than ever to high fees, misleading terms and other exploitation driven by efforts to generate sales commissions.
“Many of the same players that fueled the subprime-mortgage boom, ultimately with disastrous consequences, have turned their attention to the reverse market,” Law Center researchers concluded. “Predators who once reaped profits from exotic home loans have now focused on wresting more wealth from vulnerable seniors.”
Reverse mortgages enable homeowners age 62 and older to tap their home equity for monthly income, a line of credit or lump sum of cash. The tax-free money doesn’t have to be paid until borrowers die, sell their home or are unable to pay for taxes or other general upkeep. Most are also insured by the U.S. Department of Housing and Urban Development, which preserves the payout even if the lender goes under.
Sales of reverse mortgages have skyrocketed nearly threefold in the past five years and are on pace to set a record this year, according to HUD. More than 112,000 were sold in 2008 and nearly 78,000 by May of this year, according to the latest data.
From its early days, the reverse-mortgage industry has been tainted by allegations that some lenders manipulated older borrowers into giving up the equity in their homes.
Industry officials say those days are long past. They disputed the new study’s findings, saying the business is strictly regulated. Top reverse-mortgage lenders, such as Wells Fargo, Bank of America and MetLife, among others, have adopted a strong ethics code prohibiting predatory practices.
“This study sounds like a rehashing of some of the same old, broad allegations that are just not true,” said Atare E. Agbamu, an industry consultant and director of reverse lending for Minneapolis-based AdvisorNet Mortgage LLC. “There are layers upon layers of consumer safeguards built into this business.”
In fact, the latest safeguards took effect last year when Congress passed a law capping some reverse-mortgage fees. It also required pre-loan consumer counseling and barred lenders from “cross-selling” annuities and other complex financial products along with reverse mortgages.
But that doesn’t go far enough, according to the consumer study. In too many cases, consumers are being gouged by fees, sold on annuities and given cursory reverse-mortgage counseling over the phone, according to the consumer-advocacy group.
“There is now an urgent need for more safeguards at the federal and state level to protect consumers from reverse-mortgage abuse, help seniors preserve their home equity and ensure reasonably priced, fairly structured reverse mortgages are available for those who need them,” the study said.
It cited comments earlier this year by U.S. Comptroller of the Currency John Dugan, who told a bankers group in Orlando that some aspects of the reverse-mortgage business require greater regulatory scrutiny.
“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,” he said.
All federal regulators aren’t on the same page, however, about the reverse-mortgage issue. HUD insisted that the laws already in place have done a good job of protecting seniors while also supporting important services that the industry provides.
“Existing protections have contributed greatly to the success of the [HUD-insured reverse-mortgage] program, which has provided financial security to several hundred thousand seniors,” the agency said in a statement. “We will certainly share our insight to ensure that the comptroller of the Currency has accurate information on which to base any regulatory changes.”
There are positives and negatives to consider when considering a reverse mortgage:
Reverse mortgages for seniors can be set up as a monthly payment, line of credit or a lump sum—whatever works best.
No matter how the reverse mortgage is set up, the home owner does not make any monthly payments.
No monthly payment is due from the home owner unless he or she dies, moves or sells the home. At that time, the loan is due in full, plus interest and fees.
The home owner can receive monthly income from a reverse mortgage as long as he or she lives in the home as a primary residence. A home owner could potentially continue to receive monthly payments even after the loan balance is higher than the amount that the house is worth.
Neither the home owner nor his or her heirs will ever owe more than the home is worth, no matter how many payments are received or how high the interest rates become.
It’s fairly easy to qualify for this loan since credit scores and income are not part of the qualification process.
Reverse mortgages for seniors have high closing costs. The senior must pay origination fees that are about double what they are for conventional mortgages and mortgage insurance. The interest rates are adjustable.
For seniors who depend on Medicaid or other state or federal programs, it’s important to consider if reverse mortgage payments will affect their eligibility.
Also, the senior is required to attend counseling by an independent HUD counselor prior to receiving a reverse mortgage. These are complex loans and this is a measure of consumer protection, and this point should be high on your reverse mortgage pros and cons checklist. Finally, any individual being offered a reverse mortgage by an investment professional (financial advisor, banker, mortgage lender, etc.) should consider whether the investment professional is recommending the reverse mortgage because it benefits the individual or because it benefits the investment professional. A reverse mortgage offers high commissions to the investment professional that finalizes the transaction, and these fees can be the motivation in recommending the reverse mortgage. Be sure that a reverse mortgage is appropriate for you before proceeding.
If you have questions about reverse mortgages, or if you believe that you have been the victim of a securities fraud, The White Law Group may be able to help. To speak to a securities attorney, please call our Chicago office at 312-238-9650 for a free consultation.
The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida.
For more information on The White Law Group, visit http://www.whitesecuritieslaw.com.