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Reverse mortgages have gotten a lot of ink lately as a profitable loan favored by demographics as millions of babyboomers pass its minimum qualifying age of 62. But a session at the Mortgage Bankers Association's Secondary MarketConference in Boston showcased some of the product's negative features.
Lorna M. Neill, associate at K&L Gates, told a session at the secondary conference that reverses are now receivingmore scrutiny by regulators. The reason? "Reverse mortgages are viewed as fertile grounds for predatory practices,"she said.
As reverses combine a complex product with a vulnerable population, clear communication by lenders becomes an essential,as does counseling, which is mandated by the Federal Housing Administration and Fannie Mae, the two current sourcesof most reverse mortgages.
| 'Reverse mortgages are viewed as fertile grounds for predatory practices,' said Lorna M. Neill, associate at |
A special red flag on reverses is "unnecessary and overpriced annuities," she said. California has alreadyenacted a prohibition on annuities, and Arizona and Rhode Island are looking at following suit, she said.
In addition, the fees associated with reverses mean that the product may trigger high-cost loan status, a designationcommon on predatory loans. Alaska, Illinois, and Cook County (Ill.) already do so, she said.
In addition, lenders must be careful about observing ECOA prohibitions which mandate against discrimination onthe basis of age and gender, since reverses are for seniors, and women traditionally outlive men.
Other speakers at the session pointed out a drumbeat of bad media publicity for the product, and that reverse mortgagesare fertile ground for fraud, including fraud for profit, fraud for housing, and affinity group fraud.
Ms. Neill and two K&L Gates colleagues, Steven M. Kaplan and Nanci L. Weissgold, recently co-authored an alerton the legislative and regulatory prospect for reverses in 2008.
Reconciliation of House and Senate versions of FHA reform bills should be monitored, they said, though they trackpretty closely on HECMs (FHA's reverse product is called a Home Equity Conversion Mortgage). "Among othermeasures," they write, "the House version eliminates the cap on the number of HECMs that FHA may insureeach year." As in the Senate bill, FHA would be empowered to make more than the current 275,000-per-year limit.The Senate version proposes to reduce HECM origination fees.
The Senate has seen introduced a Reverse Mortgage Proceeds Protection Act that was referred to the Senate BankingCommittee, but the authors note that no similar legislation has been introduced in the House of Representatives.
Referral arrangements and suitability requirements also emerged as congressional concerns at a hearing last December,the authors write.
