Reverse Mortgage Loan Blog

Reverse mortgages could be the next mortgage product to experience rapid growth while the unscrupulous take advantage of a vulnerable segment of the population, top U.S. bank regulator John Dugan said on Monday.

He was speaking to an American Bankers Association conference.

“While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of sub-prime mortgages – and that should set off alarm bells,” Dugan said.

Dugan heads the Office of the Comptroller of the Currency which supervises our nation’s largest banks. He mentioned regulators are considering further guidelines in order to ensure more protection for reverse mortgage borrowers.

Reverse mortgages are loans for homeowners who are at least 62 years old and allow them to use a portion of the equity they have built in their homes as they age.

In a reverse mortgage, the homeowner receives money from the lender, which does not have to be repaid as long as the borrower lives in the home.

The feature reverse mortgages have in common with subprime mortgage products is negative amortization. Negative amortization occurs because all payments on the loan are deferred to the end of the mortgage term.

Reverse mortgage borrowers are made aware of the negative amortization feature by both the reverse mortgage lender and during a mandatory conversation with a HUD certified counselor, who makes sure the lender disclosed all the features of the loan, including rates, fees and how the loan works.

Dugan further said regulators need to set more standards for proprietary reverse mortgage products – such as Jumbo type loans. But, at this time, there are no lenders offering proprietary reverse mortgage products. The Federally insured FHA product is, at this time, the only offering available to potential reverse mortgage borrowers.

“Regulators also need to be vigilant about misleading marketing and need to crack down on lenders who try to bundle a reverse mortgage with other financial products, such as an annuity or life insurance products”, Dugan said.

It was unclear what further provisions legislation would contain as it is already illegal for anyone originating to sell any other financial product funded by proceeds from a reverse mortgage – including annuities.

Additionally, safeguards are in place via HUD certified counselors to investigate if the borrower has been offered such a combination of products.

A consumers best protection against fraud is simple: Work with someone local who has a good reputation and is experienced with reverse mortgages. A reverse mortgage, or any mortgage, should never be transacted by telephone or Internet.

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