Study: Trouble Ahead for Reverses

Securitization and yield spread premiums are incentives for bad loans to be made in a volume-driven reverse mortgage market, according to a new study by the National Consumer Law Center. The group issued a report saying that many of the ingredients behind the subprime crisis are now being seen in the reverse mortgage business. During a conference call, Rick Jurgens of NCLC said "arrangers get paid when deals get done and they don't get paid when no deal is done and that's a problem. The lesson from the subprime debacle is even stronger in this market." The approach to allow market forces to drive out the bad players was tried during the subprime crisis and didn't work, he said. When asked whether it made a difference that almost all of the reverse mortgages being securitized today are through government channels (unlike subprime loans which went through Wall Street firms), Mr. Jurgens said "I don't think we can take too much comfort that the capital markets are in bad shape right now to think that we won't see some of that same drive to do deals coming out the other side." NCLC believes reverse mortgage customers need strong consumer protections and "the tiger of securitization has to be harnessed before we go for a ride on that one again," he said.