Reverse Mortgage Loan Blog

History has been consistent on one thing when it comes to finance: The law of unintended consequences often prevails.

In 2002 the percentage of homeownership in Minnesota was 77 percent, the highest in America, and the highest in history. With a red-hot real estate market, the mortgage industry was spending hundreds of millions of dollars nationwide in lobbying and political contributions to spur the market even more. Their rally cry was not unheeded.

President Bush proclaimed America as “the Ownership Society,” embracing homeownership as a key to national security: “… if you own something, you have a vital stake in the future of our country.” He announced new programs for down payment assistance, tax credits for affordable homes and increased education programs. Most important, he pledged to increase the investment of government-sponsored enterprises like Fannie Mae and Freddie Mac in the secondary mortgage market by almost a half-trillion dollars. He also challenged the mortgage industry to free up more capital for more lending.

Taking his cue from the president, then-Federal Reserve Chairman Alan Greenspan criticized the prevalence of fixed-rate mortgages. He urged the mortgage industry to come up with more “innovative” projects and suggested that more American consumers should take out adjustable-rate mortgages (ARMs).

This not-so-conservative suggestion - coming at a time when mortgage rates were at record lows - was quickly
embraced by the mortgage industry. The industry began to aggressively market “exploding ARMs” in the subprime market, where borrowers were lured in with attractive low teaser rates that would “explode” in just two or three years, sometimes doubling the monthly payment for people already struggling to make ends meet.

The unintended consequence? Mortgage foreclosures are now at record levels for recent history. The homeownership rate in Minnesota has dropped to its 1995 level of 73 percent. More Minnesotans are expected to lose their homes as they struggle with higher interest rates under their exploding ARMs.

Foreclosures occur for a variety of reasons, including job loss, divorce, medical debt, and people who simply borrow more than they can afford. Today, though, not many people would disagree that the exploitation by predatory lenders taking advantage of an expanded secondary market and high-risk mortgage products has contributed to the destabilization of homeownership, the stock market and the entire economy.

We need to make sure the disastrous experience with subprime lending is not repeated with reverse mortgages. In 2006 President Bush signed the Deficit Reduction Act. One major change in the law was to limit the equity a Medicaid recipient can have in his or her homestead. At the urging of the financial industry, Section 6014 of the law actually encourages senior citizens to take out reverse mortgages, which in many cases are costly and unnecessary.

In a reverse mortgage, a lender loans the borrower (who typically is at least 62 years old) money based on the equity in the borrower’s home. Unlike a traditional mortgage, a reverse mortgage is not repaid until the borrower moves or dies.

With an estimated $4.3 trillion in home equity held by Americans age 62 and older, this is an attractive market niche for lenders.

The products are suitable for some borrowers, but national senior advocacy groups have reported an increase in seniors who are pitched reverse mortgages that are too expensive or not suitable.

They also report seniors being duped into taking out a reverse mortgage merely to put the proceeds into an investment like a long-term deferred annuity, where the cost of the mortgage outweighs any investment gains on the new investment. The winner in those cases: the agent, the mortgage company and the insurance company. The loser: the senior citizen.

Earlier this month FBI Director Robert Mueller told a U.S. Senate Committee that in addition to fraud in the subprime market, the FBI has observed a spike in reverse mortgage fraud, both as to excessive fees and abusive marketing practices.

As the economist Yogi Berra once observed: “It is déjà vu all over again.”

Found here.

Bookmark It

Hide Sites