Fraud scars image of reverse mortgages

Why are higher-ups ignoring positives?

By Inman News Feed
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Why are higher-ups ignoring positives?

Tom Kelly
Inman News

Comparing every loan's shortcoming -- real or perceived -- to a "subprime" product needs to stop.

For example, U.S. Comptroller of the Currency John Dugan made an astonishing remark in a prepared statement recently in Orlando: "Consumer compliance risks with reverse mortgages are real, and indeed, I am struck by some of the similarities to the risks of subprime mortgages."

Federal Housing Administration Commissioner Brian Montgomery is the assistant secretary of housing for the U.S. Department of Housing and Urban Development. He is a thoughtful, candid Republican from Texas who oversaw the nation's most popular reverse mortgage program for the past several years. He has predicted a bright future ahead for reverse mortgages, despite the current credit crunch, and he even tried to convince his mother to take out a reverse.

Montgomery was stunned by Dugan's comments and immediately stated his opinion in writing to one of the nation's top banking officials:

"Your comments may have created unnecessary mistrust and confusion about a product that has a very successful track record of giving thousands of seniors the opportunity to use the equity in their homes to maintain an independent lifestyle. I worry that your comments could dissuade many who could truly benefit from a reverse mortgage from using the program and benefiting from the financial independence it provides."

FHA is now shouldering a greater portion of the residential loan load, and its insurance component has come under greater scrutiny because of it. The growing number of reverse mortgages has brought more incidents of fraud, which have unfairly grabbed the headlines from the thousands of satisfied seniors who took out a reverse mortgage.

More than 450,000 Home Equity Conversion Mortgages (HECMs) have been made since 1989, the year FHA launched its reverse mortgage pilot program. FHA insured approximately 112,000 HECMs in fiscal year 2008, up from 107,367 in 2007 and 43,131 in 2005.

Unfortunately, it's always been the case for reverse mortgages that one black eye stays around for the whole fight. Did the mortgage industry get rid of every adjustable-rate mortgage when early borrowers got whacked by the payment shock brought by the first adjustment? No, it implemented caps and ceilings, just like HUD and reverse mortgage lenders have worked to improve the Home Equity Conversion Mortgage.

Montgomery fears Dugan's comparison of reverse mortgages to the subprime market will also linger in the minds of consumers. Also included in the letter:

"Your comparison of the reverse mortgages product to subprime loans was inaccurate and may cause significant damage to a very worthwhile program. People rely on an official opinion -- especially regulators -- as a representation of factual information, and they act on that information."

Much of the same "official opinion" perception can be said of the investigation of reverse mortgages by U.S. Sen. Claire McCaskill, a D-Mo. The chairman of the Senate Special Committee on Aging is again chasing the tired issue of seniors being steered to annuities and other investments with their reverse mortgage funds. Didn't the previous investigation on annuities produce proper caveats, warnings and restrictions?

Just once, would some legislator please take the time to accentuate the positive of the reverse program? Clearly, people are covering the other side.

Let's face it. Flipping, equity skimming, unauthorized recipients and poor annuity choices plague all loans. To avoid cases of property flipping and other fraud, lenders now must take steps to ensure that (a) only current owners of record may sell properties that will be financed using FHA-insured mortgages; b) any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and c) FHA will require additional documentation validating the property's value for resale that occurs between 91 and 180 days where the new sales price exceeds 100 percent of the previous sales price.

Seniors are clearly the most susceptible group when it comes to financial decisions. But there are too many individuals in high places who do not understand reverse mortgages and refuse to expose their benefits yet they trot out every single blue-haired lady who was stiffed of her hard-earned equity. No happy success stories here?

Look at the popularity of the reverse mortgage program. The way it has been portrayed -- and communicated -- makes it seem that all applicants stand to get swindled. Not so.

Tom Kelly's book, "The New Reverse Mortgage Formula" (John Wiley & Sons, New York), is available in many bookstores and on amazon.com.

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