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October 12, 2009

Are Senior Citizens the New Targets for Predatory Lenders?
    by Robert Kropp

The National Consumer Law Center finds an increase in reverse mortgages directed at older homeowners, and details potential opportunities for abuse by lenders. -- Predatory lending practices in the home mortgage market, which were the primary forces that led to the current economic crisis, targeted many of society's most vulnerable members. As an attitude of business as usual has returned to Wall Street, should it be a surprise to anyone that many of the same players in the subprime market have now turned their attention to another vulnerable segment of society?

Reverse mortgages, available to homeowners age 62 or over who have little or no mortgage debt, "continue to grow despite the economic downturn, with volume more than doubling between 2005 and 2008," according to a recently published report by the National Consumer Law Center (NCLC). The report predicts that 2009 "appears to be on pace for a record year."

In a consumer advisory issued in September, the Office of the Comptroller of the Currency (OCC) defined reverse mortgages as "complex, home-secured loans. Under a reverse mortgage, a consumer receives payments from the lender – either over time or all at once – based on the value of the home at the time of the loan. As the consumer receives payments, and interest and fees accrue, these amounts are added to the loan balance."

Because loan fees associated with reverse mortgages are based on the value of the home, and not the amount of money borrowed, they can be very expensive, according to the AARP. As a result, leaving a home to an heir debt-free may be difficult for the borrower.

According to the NCLC report, entitled Subprime Revisited: How the Rise of the Reverse Mortgage Lending Industry Puts Older Homeowners at Risk, "the continuing availability of reverse mortgages is good news for seniors who need to cash out some of their housing wealth." However, the report warns that "growth in the reverse mortgage market has unleashed other, more malign forces."

The report reveals that some of the same players in the subprime lending market have now turned their attention to reverse mortgages. Wells Fargo, for instance—a recipient of $25 billion in Troubled Asset Relief Program (TARP) funds—was a leading subprime lender in 2006. In 2008, Wells Fargo originated nearly 20,000 reverse mortgages, while espousing its responsible mortgage lending principles. But despite those principles, Wells Fargo was targeted in a lawsuit by the City of Baltimore for its subprime lending practices. The Attorney General of Illinois has also filed a complaint against Wells Fargo. Because of lending track records such as that of Wells Fargo, the report advises that "Claims by lenders that they will protect the interest of consumers in the lending process should be approached with caution."

Perhaps of particular concern is the report's finding that "securitization, which allowed subprime loan originators to disassociate themselves from the downside risks of abusive lending, is becoming commonplace in the reverse mortgage industry."

Because reverse mortgages carry so much risk, homeowners who receive a federally insured Home Equity Conversion Mortgage (HECM) must first receive counseling. But proprietary reverse mortgages, which are sold by private financial institutions, have no such requirement, according to the NCLC report. Furthermore, the NCLC found that counseling under HECM requirements is often inadequate.

Concluding that "Federal and state governments must act now to ensure that reasonably priced and fairly structured reverse mortgages are available for those who truly need them, and that vulnerable seniors are protected from predatory or abusive lending practices," the report offers several recommendations. A suitability standard should be enacted for all reverse mortgages, and yield spread premiums—which reward brokers for steering borrowers to loans with higher interest rates—must be banned.

Private equity conversion products, which are sold by private financial institutions, must be regulated, and effective data on all reverse mortgages should be implemented.

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