As the author of a blog post two years ago titled "The Next Subprime: Reverse Mortgages," you better believe that a new position paper from the National Consumer Law Center, "Subprime Revisited: How Reverse Mortgage Lenders Put Older Homeowners' Equity at Risk," caught my eye.
If you are curious about how reverse mortgages -- lending products designed to allows seniors to transform their home equity into cash flow -- work, this is the paper for you. And if you are suspicious that those phone calls to your grandmother telling her of the great deal awaiting her from her local mortgage broker are not completely on the up and up, well, you have good reason.
As Katie Porter summarizes at Credit Slips, the parallels between the growing market for reverse mortgages and the now-defunct go-go market for subprime mortgages are eerie: sketchy "incentives for broker compensation, a rapidly growing securitization market, and weak or non-existent regulation..."
Despite the parallels, I don't think we are in any immediate danger of a reverse mortgage implosion sabotaging Wall Street or Main Street. (That job, we can safely leave to the oncoming commercial real estate catastrophe.) Reverse mortgage volume did double between 2005 and 2008, but only $17 billion in home equity was tapped by about 100,000 seniors in 2008. In 2006, the subprime mortgage market added up to about $1.5 trillion.
Still, estimates for the total amount of home equity owned by seniors range from $2.8 to $4 trillion, so there's certainly room for growth. More importantly, there's plenty of room for abuse -- for unscrupulous mortgage brokers and lenders to sell seniors products they don't need and don't understand. Just the existence of a "yield spread premium" -- in which lenders pay brokers higher fees for mortgages that charge higher interest rates, is a clear incentive for bad behavior.
Katie Porter suggests that a Consumer Financial Protection Agency would be an awfully handy thing to have watching over the industry, but in lieu of that, the NCLC is suggesting a "suitability standard" in which lenders would have to affirm in good faith whether a given loan was "appropriate" to a borrower. Guess what? The NCLC has been down this road before.
...[I]n August 2006, advocates from the National Consumer Law Center recommended the imposition of a duty of good faith and fair dealing to address irresponsible underwriting, unsuitable loans, and steering in the nonprime market. The Mortgage Bankers Association responded with a policy paper urging Congress to resist pressure to impose a suitability standard and instead allow the market to offer borrowers "unparalleled choices and competition resulting in lower prices and greater opportunities than ever before to build wealth and wellbeing that homeownership brings." In the wake of heavy industry lobbying, neither Congress nor federal regulators chose to adopt a suitability standard for nonprime mortgages. Partly as a result, the nation is suffering the consequences of widespread improvident lending in the subprime market.
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