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Reverse Mortgages -- The Next Big Problem Area?

posted by Bob Lawless

In October 2011, I testified to the U.S. Senate Banking Committee's Subcommittee on Financial Institutions and Consumer Protection. In a nation of short memories, the hearing took place amid claims that we did not need new consumer financial regulation. Existing institutions could adequately take care of things. Thus, among other things, the hearing focused on what specific tasks the Consumer Financial Protection Bureau (CFPB) could undertake.

In my written testimony, I mentioned one growing area of concern:

Reverse mortgages allow older persons to draw on equity they have in their homes and receive a stream of payments to help with expenses in their retirement years. To make an informed decision on a reverse mortgage, a consumer needs a good understanding of the value of the home, life expectancy, and a competitive interest rate. All of these pieces of information require estimation. Moreover, we can expect consumers to display bias in making these estimates such as overestimating the value of the home or life expectancy. In addition, persons contemplating a reverse mortgage often have liquidity constraints that create pressure to agree to the reverse mortgage. Some of the same players in the subprime lending market have moved into reverse mortgages, leading to complaints from consumer advocates that were similar to the complaints about subprime lending. Reports of high fees and financial products inappropriate for the consumer are becoming more and more frequent in the reverse mortgage industry, which seems poised to become the next big consumer lending problem area.

Two years before that, Katie Porter had a Credit Slips post highlighting a National Consumer Law Center report on reverse mortgages.

Now, in today's New York Times, Jessica Silver-Greenberg documented problems in the reverse mortgage industry. It is good to hear that both the CFPB and the Departing of Housing and Urban Development are taking steps toward preventing the abusive practices that are beginning to arise in this industry.

Comments

Currently FHA is the only reverse mortgages available. Fee's are limited by the government. Persons must go attend a counseling session with a HUD approved counselor before the applicants can apply for a reverse mortgage. The nuainces of a reverse mortgage is explained to the applicant(s). The applicant has the opportunity to ask questions about reverse mortgages with the counselor and fully understand the product. They have the choice to proceed or decline once they apply for a reverse mortgage and the terms and fees are provided to them. These advocacy groups do more harm to good at times. What really needs to happen is for these so called "help" groups to stop suckling off the teet of the system. Let them have to obtain their money as regular business.

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