Many of the now-discredited practices that enabled the subprime mortgage market to boom and then bust have reappeared in the reverse mortgage business, threatening senior citizens and potentially putting taxpayers on the hook for billions, according to a report issued Tuesday.
Reverse mortgages enable homeowners aged 62 and over to withdraw equity from their homes. Unlike a traditional mortgage, owners essentially sell back their home over time to a lender in return for a steady stream of money.
The National Consumer Law Center argues that the industry is rife with abuse: deceptive marketing claims that unfairly target seniors; a lack of sufficient counseling for borrowers, adequate consumer protection and enforcement against bad actors; and the presence of kickbacks to brokers whose compensation rises if borrowers pay higher rates.
Such mortgages are increasingly coming under fire: the fact that seniors are at risk makes for "a scary mix," says Senator Claire McCaskill (D-Mo.), who says that reverse mortgages "target the most vulnerable."
And the industry is rapidly growing. Of the 2,700 reverse mortgage lenders, 1,500 made their first loan in 2008, according to a June report by the Government Accountability Office. This year, the number of reverse mortgages is expected to triple the total in 2004, setting an all-time high.
"It's eerily similar to the subprime boom," said Tara Twomey, an attorney with the National Consumer Law Center, a nonprofit consumer advocacy group. "This market could be another major fiasco."
About 90 percent of the market is controlled by the Federal Housing Administration, which insures lenders against losses. Created in 1988 by an act of Congress, the program is supposed to act as a financial backstop for elderly homeowners.
In 1990, there were just 157 reverse mortgages. This year, homeowners will take out about 115,000.
But the aging of America (McCaskill notes that 10,000 Americans turn 62 every day), fears about Social Security, rising health care costs and the untapped equity in seniors' homes (private industry leaders peg the total at $4 trillion) are likely to make the industry even bigger -- and the lack of proper safeguards threatens seniors. Taxpayer-provided insurance puts taxpayers on the hook for losses.
"If this goes wrong, these chickens won't come home to roost for years," McCaskill says.
To that end, the Missouri senator says she's working with Representative Barney Frank (D-Mass.) to introduce legislation aimed at reining in the industry. The bill is expected to strengthen consumer protections and introduce a standard whereby loan originators -- and loan wholesalers on the secondary market -- will be on the hook if homeowners are swept up in predatory deals. McCaskill hopes the bill, which has yet to be released, will clear the Senate early next year.
"We're trying to stem the tide of a growth industry," she says, which is expanding "probably not for all the right reasons." Referencing commercials advocating reverse mortgages on cable television, she notes that "when we have a flood of TV commercials saying this is a government benefit, antennas should go up."
The National Consumer Law Center wants loan originators and wholesalers to be liable for damages in lawsuits brought by aggrieved homeowners.
Thus far, though, the claims of abuse are merely anecdotal, the group acknowledges, as there are no empirical studies demonstrating that the industry is preying upon seniors.
"There's been a lot of accusations of senior abuse and fraud, but the squawkers are a lot louder than the actual evidence," says Marty Bell, a spokesman for the National Reverse Mortgage Lenders Association.
Bell notes that he recently completed a survey of all 50 state attorneys general offices and found only six cases that are being investigated.
"We keep asking McCaskill and the Inspector General [at HUD, which investigates fraud claims] -- where's the beef? Where are the cases?" Marty Bell says. "So far, none of them have given us anything."
Twomey, of the National Consumer Law Center, countered that the lack of investigations points to a lack of enforcement. State attorney general offices are stretched thin handling traditional mortgages and loan modification scams, she says.
But Peter Bell, president of the National Reverse Mortgage Lenders Association, said he estimates that as many as half of all reverse mortgages are taken out by seniors who can't afford to pay their current mortgage, or are facing foreclosure.
"Isn't it better to keep seniors in their homes?" he asked.
Read the report: