Reverse Mortgages, the New Subprime?

A recent report from the National Consumer Law Center (NCLC) warns that the reverse mortgage industry could very soon become the new subprime. The report claims that former subprime lenders have altered their business model in order to cater to reverse mortgages instead. While the products are very different in their makeup, the NCLC says the ways in which subprime and reverse lenders attract customers may be the same:

Some of the same U.S. lenders that helped drive the real estate boom with loans to home buyers who couldn’t afford the payments are now targeting seniors, the center said. Brokers, who are given financial incentives to sell the loans, may be making misleading claims to potential customers, according to a report titled “Subprime Revisited,’’ that was released today by the Boston-based NCLC.

“This market is designed to serve seniors, so when we find abuses cropping up and migrating from the subprime market to the senior market, that sounds an especially loud warning bell,” said Rick Jurgens, an advocate at the National Consumer Law Center, who contributed to the report.

A reverse mortgage, a.k.a a “home equity conversion mortgage,” allows (usually) elderly homeowners who have a substantial equity in their home to convert the equity into cash. A lender makes regular payments to the homeowner, in exchange for a corresponding lien that builds against the property. The loan must be repaid at a specified time or when the borrower no longer occupies the property.

Since reverse mortgages  deal with such a narrow demographic, their presence in the marketplace is rather small, and so is its threat of fraud. That being said, it doesn’t mean that the industry is free of “deficiencies”:

But in a report released in late June, the Government Accountability Office found deficiencies in HUD’s counseling efforts. Although counselors in general provided accurate information about the main features of the product, they overlooked some key details. For example, seven of the 15 housing counselors the GAO examined failed to discuss with borrowers all of their alternatives to reverse mortgages.

That’s significant because in many cases, a reverse mortgage isn’t the best option. The product comes with upfront fees that make it unattractive for short-term financing, so anyone planning to change residences within a year or two should probably stay away.

While Phillip Moeller, of U.S. News & World Report, feels that the NCLC’s concern “is a bit over the top at this time,” it’s never a bad idea to re-examine your financial needs and goals (not to mention the alternatives) to determine if a reverse mortgage is right for you.

Be sure to visit both HSH.com and AARP.org to learn more about reverse mortgages.