Reverse Mortgages: Trouble Brewing

This post originally appeared on Caveat Emptor.

In recent years, the Office of the Comptroller of the Currency (OCC)– the main federal regulator of the nation’s biggest banks – has seemed concerned with consumer protection only when it was acting aggressively to protect “its” banks from the prospect of being sued by state attorneys general for their predatory practices.  The OCC pursued this anti-consumer agenda so aggressively that even conservative Justice Antonin Scalia, in a blistering Supreme Court opinion issued earlier this week, felt compelled to denounce their over-reaching.

In a little-noticed speech (pdf) on July 8, however, Comptroller John Dugan – perhaps trying to repair his agency’s tattered reputation – came across as a born-again consumer protector.  He identified an enormous potential danger to consumers and urged regulators to take prompt action to prevent widespread abuses.  The looming danger:  the reserve mortgages that are being heavily marketed to America’s senior citizens.  Dugan emphasized this product’s

…similarity to subprime mortgages: a vulnerable customer class; complex product features that can be difficult to explain and can be susceptible to deceptive marketing; nontraditional, asset-based underwriting; and the potential for skewed incentives for key distributors of the product.

That’s a strong statement, even in the bureaucratic prose of a federal regulator.  In simpler terms, Dugan is warning that the predators and scam artists responsible for the subprime mortgage rip-off are now targeting unwary, and easily exploited, older homeowners as their next victims.  Millions of senior citizens either own their homes outright or have paid off most of their mortgages, and their combined home equity provides a huge pool of wealth that the predators would like to transfer into their own pockets.

Underlining Dugan’s point, the Government Accountability Office (GAO) recently released a report (pdf) that confirmed three major problems with the way that reverse mortgages are made.  First, the marketing used to promote these loans is often deceptive; second, the counseling provided is often inadequate (and 90% of this required counseling is done by telephone rather than in person); and third, lenders too often engage in “inappropriate cross-selling” – that is, they encourage seniors to use the proceeds from their reverse mortgage loan to purchase insurance or annuity products that are ill-advised for the seniors but generate generous fees for the lenders.

(photo:  Lester Public Library)