The Reverse Mortgage Tsunami
The National Law Center in Boston has recently put up a red flag concerning the burgeoning “reverse mortgage” business. The NCLC cautioned that many of the same deceptive practices that haunted the sub-prime mortgage business are now beginning to appear in the reverse mortgage business. These mortgages allow homeowners, who are over 62 years old, to convert their home equity into cash without having to move out of their houses. Since the borrower get a steady stream of income, and the loans are only repaid when the borrower dies, the reverse mortgage market has become a very popular way for seniors to cash in on decades worth of mortgage payments and accumulated capital gains. In fact, in 2008 alone, more than 100,000 seniors used reverse mortgages to get their hands on $17 billion of equity.
According to Senator Claire McCaskill, Democrat from Missouri, Congress needs to review two aspects of this rapidly growing business. The first question is whether seniors are being routinely mislead about the costs and benefits of reverse mortgages by financial institutions hungry to increase their fee income. In some cases, financial institutions are describing reverse mortgages as a “government benefit”, to which they are entitled. The second, and perhaps the most important question is whether the huge, and growing, volume of reverse mortgages will end costing the taxpayers billions of dollars, similar to the financial burden associated with the sub-prime mess. The similarities are troublesome: just like the sub-prime mortgages, reverse mortgages are being bundled together and resold as mortgage-backed securities. Also just like sub-prime mortgages, reverse mortgages are backed by the U.S. Government (i.e. the American taxpayer).
Let a clarion call go out to all of us who are listening, and to all of our elected representatives; please do not let the taxpayer be taken for another ride by Wall Street financial firms hungry to turn a profit on the next trillion dollar wave of mortgage debt. With baby-boomers now entering their mid-sixties, the reverse mortgage wave is bound to become a tsunami. Now is the time for Congress to enact sensible legislation to regulate this profitable, yet risky business. Senator McCaskill is right; we got caught sleeping at the switch when the sub-prime bubble burst, so let’s not get caught sleeping again.
—Rich
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_e.png?x-id=7699942b-0dce-4bff-8caf-651683609e08)
6 Comments »
Leave a comment!
The key difference between a mortgage and a reverse mortgage is, of course, the question of EQUITY. Thus, is someone is withdrawing the equity from their paid off home they cannot fall behind on the payments and default leaving the bank holding the keys and debt, etc… That would be a key difference.
Harrison,
Once the reverse mortgages are sold, packaged together and securitized, there still remains a question of the value of the property collateralizing the Mortgage Backed Security. For example, prior to the real estate crash in 2007, mortgages were being created on properties in places like Las Vegas and Miami for greatly inflated amounts. It turned out later that the collateral values were much less than the value of the mortgage backed security. The same thing could occur with reverse mortgages.
The value of homes will always change with the economy. You do raise a good point. However I’m not sure what can be done if a house is “worth” $1 million but if there is a recession and that value drops to, say, $750,000.00.
Good post! I read this a couple days ago in the Chronicle, I was going to write about it, it was a kind of wait and see. They estimate it will be ten years down the line before the damages hit. It’s JUST another insaner loan schemes approved by the U.S. government to screw the people…
Harrison,
Before the “real estate crash” (pre-2007) I think that both consumers and investors thought that real estate values would just keep climbing, no matter what. I hope some lessons have been learned over the last few years, albeit the hard way.
Marc,
I agree. The whole concept of a reverse mortgage was invented by the financial institutions as another way to boost fee income through “buying” real estate. The risk is low for the banks because of government guarantees. Glass-Seagall would have prevented baks from doing this in the past, but the Republicans didn’t seem to like banking regulations very much.