WASHINGTON -- Consumer advocates say a growing number of older homeowners and a new crop of eager lenders could steer the reverse mortgage industry down the same financial course that toppled the subprime mortgage market and left taxpayers footing the bill.
In order to avoid a repeat occurrence, a new report by the National Consumer Law Center urges Congress to enact new consumer protections to curb shady marketing tactics, deceptive advertising and other potential abuses in the popular reverse mortgage program.
Some of the problems include television advertisements that market the loans as a "government benefit" and financial incentives for loan processors known as "yield spread premiums."
"These are financial kickbacks that make loans more profitable for lenders and loan brokers, but more expensive for borrowers," Tara Twomey, the NCLC attorney who authored the report, said Tuesday.
In addition to banning these practices and requiring better data collection by lenders, the report also calls for a new standard that requires reverse mortgage professionals not to harm the financial interest of elderly borrowers.
"If these systemic problems in the reverse mortgage market are not addressed, this market could be another financial fiasco," Twomey said.
Homeowners who are 62 and older can use reverse mortgages to borrow against their home equity. The mortgages have become popular because the money doesn't have to be repaid until the home is sold or the borrower dies or permanently moves out. The extra cash can help seniors pay for medical expenses, home improvements or simply to live more comfortably.
Ninety percent of reverse mortgage loans are issued through the federally insured Home Equity Conversion Mortgage program, which issued only 157 loans in 1990 and more than 112,000 in fiscal 2008.
Future growth is imminent, said Sen. Claire McCaskill, D-Mo., because 10,000 people reach age 62 each day. And more than 12 million people 65 and older own their homes with no mortgage debt, representing nearly $4 trillion in home equity.
With nearly 78 million baby boomers born before 1964 fueling future growth in the coming decades, the reverse mortgage industry has been attracting many new lenders. These include some of the nation's largest banks, whose profits have been drying in the recession.
But of the 2,700 reverse mortgage lenders nationwide, 1,500 made their first loan in 2008, McCaskill said. That sudden, rapid growth, experts say, also has attracted shady loan professionals who once worked in the subprime mortgage industry.
Earlier this year at a field hearing held by McCaskill, a special agent with the Department of Housing and Urban Development's Office of Inspector General testified that fraud likewise had found its way into the reverse mortgage program. He said inflated home appraisals, which increase lender profits, have been found. And in some cases, friends, family and neighbors have cashed loan payment checks after borrowers have died.
Fraud and declining home values could end up costing taxpayers because reverse mortgages are insured by the federal government. When a borrower terminates the loan because of death or some other reason, the Federal Housing Authority insurance fund would be on the hook if the loan balance exceeds the value of the properties.
HUD insures more than $105 billion in Home Equity Conversion Mortgage loans. In addition, the Government National Mortgage Association, or Ginnie Mae, issued $700 million of Home Equity Conversion Mortgage mortgage-backed securities this year, but it's unclear what the securities are now worth because of falling home values.
Peter Bell, the president of the National Reverse Mortgage Lenders Association, said he recently surveyed all state attorneys general nationwide and found only six were investigating criminal cases involving reverse mortgages. And in those cases, "the reverse mortgage lender is not generally involved in whatever scam is going on," he said.
The association's code of ethics and professional standards allow the group to report non-member violations to law enforcement agencies and publicly name any of the 600 member firms that violate the code. The first two member firms violating the code are to be named soon, he said.
McCaskill is working with Rep. Barney Frank, D-Mass., on companion legislation in the House. She said she hopes to introduce the Senate legislation by year's end and expects Senate approval in early 2010.
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