Tapping home equity was a prime driver in leading us into our current economic crisis. The same dynamic with an added twist may very well be setting the table for another round of fraud and accompanying problems.
I refer to the housing finance product known as a reverse mortgage. This product is targeted primarily at our senior citizens who are cash strapped. Rest assured many a mortgage banker who is currently hard pressed to generate fees and earnings will attempt to take Grandma and Grandpa ‘to the hoop’ with this product.
While many quality professionals within the mortgage industry will work to highlight the potential pitfalls with reverse mortgages, do not think for a second that those messages will make their way to every customer.
Bloomberg highlights that our legal profession is starting to take notice of this ‘racket’ and writes, Reverse Mortgages May Be ‘Subprime Revisited’:
Reverse mortgages may be the next subprime crisis, according to the National Consumer Law Center.
Some of the same U.S. lenders that helped drive the real estate boom with loans to home buyers who couldn’t afford the payments are now targeting seniors, the center said. Brokers, who are given financial incentives to sell the loans, may be making misleading claims to potential customers, according to a report released today by the Boston-based NCLC.
“This market is designed to serve seniors, so when we find abuses cropping up and migrating from the subprime market to the senior market, that sounds an especially loud warning bell,” said Rick Jurgens, an advocate at the National Consumer Law Center, who contributed to the report.
Reverse mortgages enable people aged 62 and over who are looking for extra cash to use the equity in their homes and receive lump-sum payments, periodic checks, a line of credit, or a combination of the three. Lenders are repaid from the sale of the home when the borrowers die or move.
The former maximum payout for reverse mortgages backed by the Federal Housing Administration was $417,000. That limit was increased temporarily to $625,500 in February. Origination fees are capped at $6,000. In 2008, more than 100,000 seniors used reverse mortgages to tap over $17 billion in home equity, according to the Housing and Urban Development Department.
I implore anybody who reads this commentary to fully explore the implied mortgage rate and home appraisal values utilized with reverse mortgages.