Reverse Mortgage Loan Blog

Aging baby boomers are fueling a steep surge in reverse mortgages, but regulators fear that big business could bring back unscrupulous lenders.

The U.S. Senate Special Committee on Aging is debating how to protect seniors.

“In the past, predatory lending practices have targeted seniors because they have more equity in their homes and often limited financial literacy,” said Bill Ferris, an AARP New York lobbyist.

Seniors have been subject to aggressive marketing through direct mail, celebrity endorsements and free lunch seminars where the risks of a reverse mortgage are glossed over and benefits are magnified, Committee Chairman Sen. Herb Kohl, D-Wisc., said at the hearing.

A reverse mortgage is a loan to homeowners above 62 years old that allows them to borrow against the equity in their home and receive a lump sum or monthly payments from the lender. Repayment of the loan is deferred until the borrower moves or dies. The proceeds from the sale of the house covers the debt, or heirs to the property must refinance the mortgage.

Reverse mortgage originations have climbed recently as the baby boomer generation hits age 62.

By the end of 2007, reverse mortgage orginations will surpass 100,000, the first year with six-degit originations in industry history, according to the U.S. Department of Housing and Urban Development. Locally, reverse mortgage lender Vertical Lend in Melville saw a 236 percent rise in originations in the first 11 months of 2007.

“This is an opportune time to continue to grow with a less than 2 percent penetration into the senior market for this product,” said David Peskin, president of Lender Lead Solutions, a division of Vertical Lend.

Suffolk County Legis. Steven Stern, chairman of the veterans and seniors committee, said the reverse mortgage industry will continue to flourish on Long Island as the high cost of living and other economic challenges leave seniors searching for cash to pay monthly bills.

“We have an aging population on Long Island, but also rising costs across the board and seniors desperately wanting to stay in their homes,” he said.

And as the legitimate marketplace grows, so could the illegitimate marketplace, Ferris said.

Seniors can be incorrectly steered by predatory lenders into a reverse mortgage, which can be beneficial but also unnecessary if cheaper funding, like a home equity loan, is available, he said, adding that reverse mortgages are much more costly than traditional financing.

Brokers have also pushed senior borrowers into purchasing an annuity, a lifetime payment from an insurance company, with a reverse mortgage, which means double the commission for the broker but excessive costs for the borrower.

One method to help educate senior borrowers used by the HUD, which backs 90 percent of all reverse mortgages, is independent counseling.

The HUD requires that all borrowers receive independent counseling before getting a government-backed reverse mortgage. Senators at the hearing found, however, that lenders often pay for these counselors after the HUD expends its small fund for these services.

“The AARP wants to see counseling be more independent because we are talking about significant amounts of money wrapped up in home equity,” Ferris said.

Sen. Clair McCaskill, D-Mo., introduced legislation directly after the senate hearing that would allow HUD to use the Mortgage Insurance Premium, an up-front and monthly fee charged on all Federal Housing Administration loans, to pay for mortgage counseling.

In this way, counselors would be free from lender influence and HUD could guarantee that counseling was indeed independent, Ferris said.

“Those seniors that take advantage of this without the pressure of a sales pitch are in a much better position to make a decision for themselves,” Stern said.

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