Consumers Should Practice Caution With Reverse Mortgages…
Reverse mortgages could be the next subprime mortgage product to experience rapid growth while taking advantage of a vulnerable segment of the population. Regulators are crafting guidelines to ensure that robust consumer protections are in place for reverse mortgages to prevent such a situation from reoccuring.
While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages. Reverse mortgages are complicated loans targeted at homeowners who are at least 62 years old and allow older Americans to live off the equity in their homes as they age.
In a reverse mortgage, the homeowner receives money from the lender, which does not have to be repaid as long as the borrower lives in the home. The great majority of reverse mortgages are insured by the Federal Housing Administration and pose limited credit risk. A different class of reverse mortgages, "proprietary products”, offer less consumer protections.
As the elderly American population grows, there could be a significant pickup in demand for proprietary reverse mortgages, which bear significant similarities to the type of subprime products that helped fuel the housing boom and bust, resulting in a widespread credit crisis and recession.
Regulators are creating more standards for proprietary reverse mortgages, are becoming more vigilant about misleading marketing and are cracking down on lenders who try to bundle a reverse mortgage with other financial products, such as an annuity or life insurance product.