Comptroller Urges More Consumer Protections for Reverse Mortgages
June 9th, 2009“While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages – and that should set off alarm bells,” Comptroller Dugan said. The experience with subprime mortgages “clearly demonstrates the link between compliance and safety and soundness.”
Reverse mortgages provide a source of income or line of credit to elderly homeowners by allowing them to tap the equity in their home without having to sell or move out of the home. The underwriting on these loans is nontraditional since no repayment is required until the homeowner dies, permanently moves out of the home, or fails to maintain the property or pay property taxes. If the home is sold to repay the loan, the borrower is not responsible for any loan amount above the value of the home. Any remaining equity above the amount due belongs to the borrower or the borrower’s heirs.
While some lenders offer their own proprietary products, 90 percent of all reverse mortgages are insured by the Department of Housing and Urban Development’s Federal Housing Administration, and known as “home equity conversion mortgages,” or “HECMs.”
Mr. Dugan said the ability of consumers to access their home equity through immediate and large lump sum payments can pose substantial risks. For example, lenders may simultaneously and aggressively market investment, insurance, or annuity products or, worse, attempt to condition loan approval on the purchase of such products. Likewise, with access to large lump sums upon closing, elderly borrowers can be particularly vulnerable to coercive sales of annuity and long term care insurance products that are expensive and may not be appropriate to their needs.
Mr. Dugan said one area that deserves particular attention is whether to impose additional requirements with respect to escrows of taxes and insurance. Nonpayment of taxes or insurance can trigger foreclosure. However, the new Federal Reserve Board escrow requirements for “higher-priced” mortgages do not apply to reverse mortgages, and HUD does not require escrows to be established in connection with HECMs.
“Given the predominance of the HECM product in reverse mortgage lending, I think it would be a major step forward for HUD to issue guidelines or requirements addressing the escrow issue for HECMs, and I would like to begin a dialogue with them on the issue,” he said. “Once they set the standards for escrows, we would ensure that they are followed by national banks for HECM products, and would ensure – by regulation, if necessary – that comparable standards apply in connection with proprietary reverse mortgages offered by national banks.”
Source: Comptroller of the Currency Adminsitrator of National Banks

