Reverse Mortgages Threaten Seniors' Wealth
(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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Americans for Fairness in Lending 
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!
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