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Reverse Mortgages Threaten Seniors' Wealth

October 9, 2009

(Originally posted on Caveat Emptor)

A new report from the National Consumer Law Center explains in detail how “[a]buses and abusers from the subprime mortgage industry have begun showing up in the reverse mortgage market, putting at risk the equity and savings of millions of seniors.” (Report is here (pdf); press release is here (pdf).)

In the aftermath of the implosion of the subprime mortgage industry, many of the bad actors who enriched themselves in that debacle are looking for the next big opportunity.  They’ve noticed the huge amount of equity that seniors have in their homes – more than twelve million seniors own their homes outright (that is, with no mortgage debt), including over seven million with annual incomes below $30,000 – and are actively scheming on how to transfer as much as possible of that equity into their own pockets.

The availability of subprime mortgages can be great boon in some cases, but they are expensive, highly complex products where opportunities for abuse abound.  The situation is so worrisome that even John Dugan, the notoriously bank-friendly chief regulator of national banks, issued a strong warning earlier this year (which we blogged about here.)

Senator Claire McCaskill, who will be introducing legislation to strengthen regulation of reverse mortgages, participated in the press conference announcing the release of the NCLC report.  As she put it:

We’ve seen this movie before and it didn’t have a pretty ending.  Abuses in the subprime lending market almost brought down our economy.  Now we’ve seeing similar abuses with reverse mortgage lending – something needs to be done before more lifesavings are depleted and more tax dollars are drained.

(Photo: Ed Yourdon)

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2 Comments
  1. Mike H. permalink
    November 18, 2009 11:28 pm

    The problem in reverse mortgages is the un-
    disclosed or poorly disclosed “yield spread
    premium” which is designed to strip the equity
    out of the Seniors home.
    An example is as follows:
    investor A lends $147,000 to correspondent B at 4.5%($6,395), who lends to C(the Senior)$112,749
    at 5.85%($6,596). Correspondent B gets a yield
    spread premium of $34,251 from the equity of C.
    B pays the broker a YSP commission of 10% of the
    YSP,=$3,425 poc, paid outside of closing!
    The 1.5% interest spread is enormous compared
    to a normal mortgage and produces this equity
    stripping Yield Spread premium of $34,251.
    Legislation should be passed limiting the yield spread interest to no more than .5% between the investor A and the Senior C.
    In the example cited, the Senior would get
    $131,855 and B would get $15,144 instead of
    $34,251. The brokers back end commission would
    be $1,514. I think this would still be incentive
    enough to do the loan, but would give the seniors a better deal.
    The word “mortgage” in French means “death gamble”. Right now, the “death gamble” is stacked in favor of the “casino”, ie the middleman correspondent lender B in the above
    example. It’s a high cost to play the “death gamble” game!

  2. May 5, 2010 3:07 pm

    I’m a Boston Photographer seeking an unusual situation. I’m doing a photograph that would document the emotion of losing your home at auction in the wake of the sub-prime mortgage debacle. If your home (or anyone you know) is being auctioned off and you/they intend on being there during the auction, Please contact me. This is a non-commercial project. There is no client. I just think it’s time to give a face (and possibly a voice) to the heartbreak of what it means personally and emotionally to lose your home. You can contact me at the following email address. steve@stevemarselstudio.com

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