Dugan: Reverse Mortgages Risky
Washington-Comptroller of the Currency John Dugan warned of the risks of reverse mortgages, which he compared to the dangers of subprime mortgages.
At a speech before an American Bankers Association conference in Orlando, Fla., last week, Mr. Dugan said the risks of reverse mortgages call for increased regulation.
"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," Mr. 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."
Because reverse mortgages are attractive to elderly borrowers, they are prone to coercive sales, misleading marketing claims and substantial fees overlooked by the borrower, Mr. Dugan said.
The comptroller should not be comparing the reverse mortgage industry with the subprime industry, said Jeff Lewis, the chairman of Generation Mortgage, Atlanta.
"This kind of ill-informed attack doesn't reflect well on an industry that has a record of doing the right thing and continues to examine itself and looks for ways to improve protections for the borrowers," Mr. Lewis said.
Reverse mortgages are subject to Truth in Lending Act and other consumer credit laws, but not all protections in the truth-in-lending law apply to reverse mortgages. In particular, the required escrow for taxes and insurance for higher-priced mortgages does not apply to reverse mortgages. Mr. Dugan said that should change.
"We can debate the merits - and need for - escrows in connection with reverse mortgages, but my starting point is that they seem to make good sense from both the consumer's and the lender's perspective because of the significant home-loss risk that flows from nonpayment of taxes and insurance," Mr. Dugan said. "It would be a major step forward for" the Department of Housing and Urban Development "to issue guidelines or requirements addressing the escrow issue for" Home Equity Conversion Mortgages, "and I would like to begin a dialogue with them on the issue."
Mr. Lewis said leaders in the reverse mortgage industry are well aware the issue of escrowing taxes and insurance needs to be addressed eventually.
However, Fannie Mae, the biggest investor in FHA-insured Home Equity Conversion Mortgages, is not evicting people or foreclosing on homes where people have not paid their taxes or insurance.
"At least to date, borrowers have not been bearing the brunt of their failure to meet those obligations," he said.
HUD, Fannie Mae and reverse mortgage lenders are looking for an innovative way to deal address escrows, including ways to assist borrowers and keep them from defaulting.
Mr. Lewis noted that simply setting aside taxes and insurance in escrows will substantially reduce the proceeds and utility of reverse mortgages for seniors. "It is a complex issue," Mr. Lewis said. "What is really upsetting about the speech is the tone and the implication that the industry is incapable of taking the best interests of our borrowers to heart and incapable of addressing this issue." The comptroller also called for better counseling for the mortgages and limiting the amount of credit available.