The next subprime: Reverse mortgages

As the baby boomers move into retirement, a new breed of ambulance chaser is following them -- reverse mortgage brokers

By Andrew Leonard

Published December 13, 2007 7:07PM (EST)

If you are a government employee asked to testify at a Senate committee hearing one would think you would do your homework, right? If the committee in question was investigating the topic of reverse mortgages targeted at the elderly, and likely to be concerned about whether predatory lenders were taking advantage of seniors, you would come with all the relevant numbers at your fingertips, right?

But when Sen. Claire McCaskill, D-Mo., asked Margaret Burns, an official at the Department of Housing and Urban Development's Federal Housing Authority how often FHA had withdrawn its authorization for agencies approved to give counseling to prospective reverse mortgage consumers for violating government guidelines, Burns said " I don't have the stats in front of me, but I can assure you that we absolutely have done that."

When McCaskill asked her how many administrative actions FHA had taken against brokers for who sold annuities and reverse mortgages at the same time -- an extremely bad financial deal for seniors -- Burns said "I don't actually know the numbers."

When Sen. Mel Martinez, R-Fl., asked whether the department had any projections on how many reverse mortgages the FHA was likely to insure if the cap that currently limits the total allowable number was raised, she said, "We do have projections, although I don't have them here with me."

It was not an impressive performance.

A reverse mortgage is a specialized product that allows anyone 62 years or older who lives in their own home access to tax-free cash based on their home equity. 90 percent of all reverse mortgages are Home Equity Conversion Mortgages insured by the FHA. The product was launched in 1989, but has rapidly grown in popularity in recent years. In 2004, the FHA insured 37,000 HECM loans. In 2007, 107,000.

FHA, the reverse mortgage industry and politicians from both parties are generally in favor of raising the cap that currently limits the total number of HECM loans FHA can insure at 275,000 -- a number reached in February. (In September, Congress suspended the cap temporarily.) But at the hearing, several Democratic Senators raised concerns that reverse mortgages offered unscrupulous lenders ample opportunity to prey on seniors. Prospective reverse mortgage consumers are required to receive counseling before taking out the loan, but HUD does not provide anywhere near enough funding to pay for sufficient counselors to satisfy demand. As a result, many supposedly independent counselors are actually compensated by lenders. Even worse, only the agencies that offer counseling require FHA approval. Individual counselors aren't required to have any training whatsoever. As McCaskill noted, "Someone could be convicted in a con scheme in a retirement community down in Florida and they could walk in and get hired as a counselor. The agency would be paid by the lender and be telling people the next day a reverse mortgage is a great thing for you -- and by the way, I have also got an annuity I want to sell you."

For politicians mindful of how subprime lending spiraled out of control, the boom in popularity of reverse mortgages poses a challenge. As McCaskill noted in her preamble, "We have gone through a saving and loan collapse, a stock market bubble, and are currently in the middle of a lending mess. Our goal is to make sure that the reverse mortgages don't become the scandal of the next decade. We are aware of reports of unscrupulous and predatory activities of some of the companies that are marketing reverse mortgages, as well as excessive fees to service the loans. It seems obvious that one of the reasons for the unprecedented growth of this market is due to the fact that there is a lot of money to be made."

One wonders whether if Democrats had been in power in Congress in 2005 and 2006 whether similar hearings would have been held taking a harder look at subprime mortgages. One wonders whether there would have been more testimony along the lines of that offered by Carol Anthony, whose 80-year-old mother was suckered into what sounds like a pretty bad deal by a major player in the reverse mortgage business, Financial Freedom (who, strangely, declined to testify at the Senate hearing). (See UPDATE below.)

When mom signed on the dotted line, she felt the salesman was her new best friend, but he wasn't. In place of the no-fee home equity line, she now had a reverse mortgage that charged 18 separate closing fees, depleting the equity in her home -- the equity that had been saved by my mom and dad one buck at a time over the many years. The 18 closing fees totaled a staggering $16,791. Next, she was forced to make home repairs of about $5,000 -- repairs that were never mandated by the equity line, but are all too common with Financial Freedom mortgages.

Now, instead of paying interest only on the $19,000 equity line, she received her first statement showing a principle balance of almost $37,000 with interest compounded daily. She would also be charged a monthly finance charged called an "MIP," and another monthly finance charged called a "finance charge." To compound the financial damages, the salesman then converted $125,000 from one of mom's municipal bond funds into a 20-year annuity. The municipal bonds had been paying mom a nice monthly income. Now, she would have to wait until her 100th birthday to see a cent of her money.

The defense of reverse mortgages is similar to Alan Greenspan's defense of adjustable rate mortgages -- they are a "valuable tool" for managing one's finances. And "just because some have abused it doesn't mean that it is not something worth doing," said Martinez, representing Florida, where the potential for cashing in big on reverse mortgages is undoubtedly huge. But reverse mortgages aren't always a good deal -- they can be substantially more expensive than home equity loans. And as the subprime lending scandal proved, if you do something badly that does get abused, well, maybe it isn't worth doing after all.

And you don't have to look too far to find that the budding world of reverse mortgages is ripe for abuse. Amusingly, even as I was reading the transcript of yesterday's hearing, I received an e-mail with the subject header "Reverse Mortgage Quote Sheet" -- ostensibly advertising a job where you could earn "$2,000 to $8,000 per month part time, filling out a Reverse Mortgage Quote Sheet." (Just imagine all the out-of-work subprime mortgage brokers jumping at that opportunity.)

I followed a link in the e-mail to the corporate Web site of WSB Reverse Mortgage -- "Retirement Dreams Come True." I clicked on a link on that page purporting to offer Reverse Mortgage Information.

And on that page, I raised my eyebrows, because the first thing I saw was Top 10 Reasons You Should NOT Get A Reverse Mortgage NOW!

Except of course, it was the exact opposite. It is a list of reasons why you might not want to get a reverse mortgage, followed by a debunking of those reasons.

For example:

Reason #3: I want to leave my home to my kids

Of course you want to be able to leave something for your kids. This is a perfectly reasonable action for parents to take. But consider this, would your kids rather have your money, or see you live a more comfortable and healthy lifestyle? Only you know the answer to this, but I believe that most of your kids would rather see you live a happy and health lifestyle, rather than get your money. And for those kids who are just waiting around for you to die so they can get their hands on their inheritance, well they probably don’t deserve it anyway! Another thought is being able to contribute something to your kids or grand kids now, rather than waiting for when you wont be around to enjoy the results.

It might not legally constitute fraud, but come on, it's the thought that counts.

UPDATE: Financial Freedom states that it wasn't the company that sold Carol Anthony's mother her mortgage. For their full statement, go here.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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