Home > All articles Subprime Revisited: How Reverse Mortgage Lenders Put Older Homeowners Equity at Risk The U.S. Office of the Comptroller of the Currency and other federal regulators that oversee banks were slow to recognize the threat posed by the recent boom in subprime mortgage lending, and slow to act. So it was noteworthy when, in June 2009, Comptroller John C. Dugan, went before a gathering of bankers and warned of a danger growing in a market designed to serve the nation’s seniors: "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.” During 2008 more than 100,000 seniors used reverse mortgages to tap more than $17 billion in home equity. Within the mortgage industry, reverse mortgages continue to grow despite the economic downturn, with volume more than doubling between 2005 and 2008.3 Despite a summer slowdown in originations, 2009 still appears to be on pace for a record year. Certainly, the continuing availability of reverse mortgages is good news for seniors who need to cash out some of their housing wealth to supplement Social Security, to meet unexpected medical costs, or to make needed home repairs. But growth in the reverse mortgage market has unleashed other, more malign forces. Many of the same players that fueled the subprime mortgage boom—ultimately with disastrous consequences—have turned their attention to the reverse 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 rich fees. Predators who once reaped profits from exotic loans have now focused on wresting more wealth from vulnerable seniors. And securitization, which allowed subprime loan originators to disassociate themselves from the downside risks of abusive lending, is becoming commonplace in the reverse mortgage industry. Reverse mortgages are complicated. The opportunities for abuse abound. Seniors, many of whom lack experience with complex financial products, often depend upon lenders and brokers for expertise and guidance. Reverse mortgage lenders, like subprime lenders, emphasize the benefits that they provide to borrowers and often tout their commitment to responsible lending principles. However, such claims are undermined by a growing public record of how subprime lenders—including some now active in the reverse mortgage market—profited from actingirresponsibly during the recent mortgage boom. In addition, reverse mortgage lenders have followed in the footsteps of their subprime counterparts by using financial incentives to reward brokers for arranging deals that boost lenders’ profits and raise the costs paid by borrowers. By adjusting reverse mortgage loan terms, such as interest rates, servicing fees, rate adjustment intervals and distributions, brokers and lenders can maximize their profits at the expense of senior homeowners. > Read the report     By KS Date 20-10-2009 Print this article | React to this article