WASHINGTON — Consumer advocates say a growing number of older homeowners and a new crop of eager lenders could steer the reverse mortgage industry down the same financial course that toppled the subprime mortgage market and left taxpayers footing the bill.
To avoid a repeat occurrence, a new report by the National Consumer Law Center urges Congress to enact new consumer protections to curb shady marketing tactics, deceptive advertising and other potential abuses in the popular reverse mortgage program.
Some of the problems include television advertisements that market the loans as a "government benefit" and financial incentives for loan processors known as "yield spread premiums."
"These are financial kickbacks that make loans more profitable for lenders and loan brokers, but more expensive for borrowers," said Tara Twomey, the Law Center attorney who authored the report.
In addition to banning these practices and requiring better data collection by lenders, the report also calls for a new standard that requires reverse mortgage professionals not to harm the financial interest of elderly borrowers.
"If these systemic problems in the reverse mortgage market are not addressed, this market could be another financial fiasco," Twomey said.
Homeowners 62 or older can use reverse mortgages to borrow against their home equity. The mortgages have become popular because the money doesn't have to be repaid until the home is sold, or the borrower dies or permanently moves out. The extra cash can help seniors pay for medical expenses or home improvements, or simply to live more comfortably.
Ninety percent of reverse mortgage loans are issued through the federally insured Home Equity Conversion Mortgage program, which issued only 157 loans in 1990 but more than 112,000 in fiscal 2008.
Future growth is imminent, said Sen. Claire McCaskill, D-Mo., because 10,000 people reach age 62 each day. And more than 12 million people 65 or older own their homes with no mortgage debt, representing nearly $4 trillion in home equity.
Earlier this year at a field hearing held by McCaskill, a special agent with the Department of Housing and Urban Development's Office of Inspector General testified that fraud had found its way into the reverse mortgage program. He said inflated home appraisals, which increase lender profits, have been found. And in some cases, friends, family and neighbors have cashed checks after borrowers have died.
Peter Bell, the president of the National Reverse Mortgage Lenders Association, said he recently surveyed all state attorneys general nationwide and found only six were investigating criminal cases involving reverse mortgages. And in those cases, "the reverse mortgage lender is not generally involved in whatever scam is going on," he said.