By: Glenn EdwardscloseAuthor: Glenn Edwards Name: Glenn Edwards
Member: Member Paladin
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Email: glenn@afadv.com
Site: http://paladinregistry.com/external/beaninformedinvestor/advisor_profile.php?advisor_id=2867
About: See Authors Posts (4) | July 9, 2009 | Investor Information

In a speech by Comptroller of the Currency, John C. Dugan, before the American
Bankers Regulatory Compliance Conference, in Orlando, Florida this past June 8, 2009, Mr. Dugan remarked that he sees similar risks in reverse mortgages as were present several years ago when subprime mortgages exploded in growth.  He listed three characteristics of the reverse mortgage market that have similar traits as the subprime mortgages; a mortgage product that has not yet gained wide acceptance in the market, a mortgage product that has the propensity to realize rapid growth in the future, and a product that may have significant compliance risks http://www.occ.gov/ftp/release/2009-61a.pdf. 

In addition Mr. Dugan pointed out that, similar to subprime mortgages, reverse mortgages are targeted to a vulnerable demographic class, have complex product features that can be difficult to explain and understand, they are susceptible to deceptive marketing, and have the potential for improper incentive for distributors, and marketers. 

To boil it down, reverse mortgage scam artists and predators will have in their sights the exploitable and unwary older homeowner.

Backstopping Mr. Dugan’s stance is a report from the GAO (General Accounting Office) that outlines three problems with this consumer product: 1) the promotion of this product is often deceptive 2) the consultation before purchase is typically done over the telephone, rather than in person 3) promoters often engage in “inappropriate cross-selling”…they persuade seniors to use their proceeds to purchase annuities that generate large fees for the institution and generally are not in the best interests of the individual. More than 12 million people 65 and older own their homes with no mortgage debt, representing nearly $4 trillion in home equity. Because the reverse loans can be paid in lump-sum amounts or in regular monthly payments, seniors who have taken out the loans often are targets for fraud.  According to Anthony Medici, a special agent with the HUD Office of Inspector General, in some cases, elderly homeless people and low-income seniors are being recruited to act as homeowners to secure reverse mortgages on properties.
 
Interestingly GNMA (Government National Mortgage Association) has issued $699 million of mortgage-backed securities this year with the collateral consisting of home equity conversion mortgages.  The U.S. Department of Housing and Urban Development, which has insured more than $105 billion in home equity conversion mortgage loans, sought nearly $800 million in the department’s 2010 budget to cover possible losses.  The number of reverse mortgages issued annually has grown from 157 in 1990 to more than 112,000 last year.

Reverse mortgages have their place in a client’s financial plan, but it is the counseling of the adviser that will help the client most efficiently put his primary home to best use in retirement.