Are Reverse Mortgages the New Subprime Loans?

When it comes to consumer risk, reverse mortgages present many of the same problems that subprime home loans did, and regulators need to take steps now -- by applying some of the lessons learned in the wake of the subprime crisis -- to avoid a similar meltdown, a federal bank official said this week.

What is a Reverse Mortgage? In a standard mortgage, payments are made to a lender each month. But a typical "reverse" mortgage provides a source of income for a homeowner, because for as long as they live in the home, the homeowner will receive money (i.e. monthly payments) from the lender. The money usually doesn't have to be repaid until the "borrower" dies, sells the home, or moves.

Why the Warning? The warning, which came Monday from Comptroller of the Currency John C. Dugan, was prompted by the risks that come along with the immediate (and often large) lump-sum payments of most reverse mortgages.

In a News Release, Comptroller Dugan warns that "lenders may simultaneously and aggressively market investment, insurance, or annuity products or, worse, attempt to condition loan approval on the purchase of such products." And Dugan points out that "elderly borrowers can be particularly vulnerable to coercive sales of annuity and long term care insurance products that are expensive and may not be appropriate to their needs."

Dugan also expressed concern about other risks tied to reverse mortgages, including substantial hidden fees that can be attached to the loan, and misleading marketing claims, "especially if the product’s incentives and fees put more of a premium on making the loan than on ensuring it is appropriate for the borrower."

Reverse Mortgages: Do Your Homework. If you're in the market for a reverse mortgage, watch out for anyone trying to tie its sale to anything, such as an annuity or insurance. As the FTC advises, "If you don't fully understand what they're selling, or you're not sure you need what they're selling, be even more skeptical. Keep in mind that your total cost would be the cost of what they're selling plus the cost of the reverse mortgage." Learn more: Reverse Mortgages: Get the Facts Before Cashing In on Your Home's Equity.

• Comptroller Dugan Urges More Consumer Protections for Reverse Mortgages (OCC.Treas.gov)
• Wall Street Journal: OCC's Dugan: Reverse Mortgages Could Pose Risks
• Getting a Good Deal on a Reverse Mortgage Loan (FindLaw)
• Real Estate Law - Overview (provided by Law Offices of H. Michael Soroy)
• Home Equity Loans and Reverse Mortgages (FindLaw)
• Deeds and the Law (provided by Polizzotto & Polizzotto, LLC)
• FTC: Reverse Mortgages: Get the Facts Before Cashing In on Your Home's Equity