Chicago A national consumer advocacy organization added its voice Tuesday to a growing chorus of concerns about the rapid growth of reverse mortgages, comparing the industry to subprime mortgage lenders.
The National Consumer Law Center noted in a report that the use of aggressive marketing techniques to sell a complicated financial product to potentially vulnerable senior citizens requires the adoption of new consumer safeguards and industry standards.
“These problems are eerily similar to those that drove the sub-prime boom,” said Tara Twomey, an attorney with the Boston-based center. “This market could be another financial fiasco.”
Twomey acknowledged that most of the data is “anecdotal at this point” and there was no statistical data to quantify how many reverse mortgage loans were made inappropriately.
In recent years, the market for reverse mortgages, particularly the federally backed Home Equity Conversion Mortgage has taken off in popularity, as strapped homeowners look for additional financial sources. In a HECM, a homeowner age 62 or older can borrow funds against the equity in their home. The loan and the accrued interest does not have to be paid back until the homeowner sells the property, dies or fails to live there for one year. Last year, some 112,000 seniors used reverse mortgages to tap more than $17 billion of home equity.
The number of loan providers has swelled as demand for the product has grown. More than 2,700 lenders offer reverse mortgages, including 1,500 lenders who originated their first HECM last year.
In June, the General Accountability Office issued a report criticizing the U.S. Department of Housing and Urban Development for its oversight of reverse mortgage, saying inconsistent counseling could lead to abusive lending practices. GAO investigators posting as consumers found that the counseling sessions required for FHA-backed reverse mortgages frequently were not long enough, did not cover all the mandatory topics and did not discuss alternative loan products.
A good counseling session would last two to three hours, Twomey said.
U.S. Sen. Claire McCaskill, D-Mo., said she hopes to introduce legislation by early next year that would safeguard seniors and regulate the industry.
“If (the reverse lending industry) goes wrong, not only are these seniors going to lose their life savings but also the government and the taxpayer are on the hook,” she said. “The government won’t really be called upon to make good on these loans until many years in the future.”