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Are Reverse Mortgages "The New Subprime"?

Posted on June 25 By Justin McHood

Recently, the Comptroller for the US John Dugan told a meeting of the American Bankers Association that there were problems lurking with Reverse Mortgages -- and even went as far as comparing reverse mortgages to subprime mortgages.

"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," Dugan said. " I believe that now is the time to get out in front of this issue - before real problems develop - so that reverse mortgage providers make these loans in a way that is prudent for both lenders and borrowers."

Reverse mortgages have grown in popularity recently and will most likely continue to grow in popularity simply due to the sheer number of people who are reaching retirement age. The baby boomer generation was not known for their saving - and it is probable that they are going to depend on their home equity as a source of retirement income.

Dugan went on to describe some of the potential problems with reverse mortgages:

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.

“Another risk is that reverse mortgage borrowers, because they have no immediate repayment obligations, may overlook substantial fees that are attached to the loan,” Mr. Dugan said. “And consumers who spend their loan proceeds quickly or unwisely may end up short of the funds they need for home maintenance or property taxes, with disastrous consequences: the failure to make those payments can result in foreclosure.”

While there may be some regulation loopholes that need to be closed, almost all reverse mortgages are insured by FHA and are originated through the FHA mortgagee program -- meaning that FHA has the authority to change the regulatory problems as needed.

So if someone is worried about FHA insured reverse mortgages becoming "the new subprime", then this is something that can be avoided by FHA stepping in and making the needed changes.

This entry is filed under Fha , Reverse mortgage , Legislation . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response.
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