WASHINGTON — The housing bubble, lax regulatory oversight and an influx of shady loan professionals have made lawmakers uneasy about the safety and soundness of the popular government-backed reverse-mortgage program.
At a field hearing Monday in St. Louis, the U.S. Senate Special Committee on Aging, chaired by Sen. Claire McCaskill, D-Mo., heard government officials and consumer advocates discuss a number of problems with the program, including aggressive marketing tactics, fraud and taxpayer liability for loans on homes whose values have plummeted.
Reverse mortgages typically allow homeowners who are 62 and older to borrow against their home equity without having to repay the money until the home is sold or the borrower dies or permanently moves out. Reverse mortgages can provide cash to help seniors pay for medical expenses or home improvements or simply to live more comfortably.
Ninety percent of the loans are issued through the federally insured Home Equity Conversion Mortgage program. The number of HECM loans issued annually has grown from 157 in 1990 to more than 112,000 last year. This year, the Department of Housing and Urban Development had endorsed about 68,000 new loans as of mid-May.
As the popularity of reverse mortgages grows, however, complaints are mounting that unsavory loan professionals who fled the troubled sub-prime mortgage industry now are plying their craft on unsuspecting seniors seeking the loans. Some agents, seeking higher fees, are steering loan applicants into costly long-term annuities, which almost always are inappropriate for seniors because they can tie up retirement savings for many years.
Consumer advocates say that the migration of bad players to reverse mortgages is no accident. More than 12 million people 65 and older own their homes with no mortgage debt, representing nearly $4 trillion in home equity. Because the reverse loans can be paid in lump-sum amounts or in regular monthly payments, seniors who've taken out the loans often are targeted for fraudulent activity.
"These are societal problems; they're not reverse mortgage problems," said Peter Bell, the president of the National Reverse Mortgage Lenders Association. While some bad players exist, Bell said, the majority of lenders that his organization represents are trustworthy professionals that follow a voluntary code of ethics.
However, a new GAO report released Monday found that marketing materials for reverse mortgages often include misleading or inaccurate information. In one example, a reverse mortgage promised "lifetime income," even though HECMs don't provide income and permit borrowers to receive equity payments only while they live in the homes, said Mathew Scire, the director of financial markets and community investment at the Government Accountability Office.
The GAO report also found that loan counselors often didn't provide reverse-mortgage applicants with required information about alternatives to HECMs.
Equally disturbing is the prospect that upon loan termination, thousands of reverse-mortgage loans will end up exceeding the values of the properties, because of declining home values. This leaves the FHA insurance fund on the hook to make up the difference.
HUD, which has insured more than $105 billion in HECM loans, sought nearly $800 million in the department's 2010 budget to cover such possible losses.
In addition, Ginnie Mae has issued $699 million of HECM mortgage-backed securities this year, according to Anthony Medici, a special agent with the HUD Office of Inspector General. Because of falling home values, however, it's unclear what the securities are now worth and whether they'll eventually become toxic, like many sub-prime mortgage-backed securities.
"We won't know if they're upside down for another five or 10 years," McCaskill said.
Medici also said that outright fraud was creeping into the program, including inflated home appraisals to increase lender profits and friends, family and neighbors cashing loan payment checks after borrowers die.
In some cases, Medici testified, elderly homeless people and low-income seniors are being recruited to act as homeowners in order to secure reverse mortgages on properties.
In April, McCaskill introduced reverse mortgage legislation to bar false and misleading advertising, thwart inflated property appraisals and assure that borrowers own and live in mortgage properties. Former President George W. Bush signed into law a similar McCaskill amendment aimed at reverse-mortgage abuses last year as part of the Housing and Economic Recovery Act of 2008.