US Banking Regulator: Reverse Mortgages Could Be The Next Subprime Product

image Reverse mortgages could be the next subprime mortgage product to experience rapid growth while taking advantage of a vulnerable segment of the population, top U.S. bank regulator John Dugan said on Monday.

Dugan, who heads the Office of the Comptroller of the Currency and supervises some of the nation’s largest banks, said regulators are crafting guidelines to ensure that robust consumer protections are in place for reverse mortgages.

"While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages — and that should set off alarm bells," Dugan said in prepared remarks to an American Bankers Association conference.

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While the majority of reverse mortgages are insured by the Federal Housing Administration, Dugan said that proprietary reverse mortgage products offer less consumer protections. 

Dugan said that as the elderly American population grows, there could be a significant pickup in demand for proprietary reverse mortgages, which he said bear significant similarities to the type of subprime products that helped fuel the housing boom and bust, resulting in a widespread credit crisis and recession.

"I believe the critical lesson here is the need to act early, before problems escalate," Dugan said. He said regulators need to set more standards for proprietary reverse mortgages. Regulators also need to be vigilant about misleading marketing and need to crack down on any lenders who try to bundle a reverse mortgage with other
financial products, such as an annuity or life insurance product, Dugan said.

If those actions are not enough, Dugan said "more definitive regulatory standards may need to be adopted, and the OCC is prepared to do that."

Update: The Wall Street Journal is reporting that Dougan said taxes and insurance costs for reverse mortgages should have to be escrowed to ensure the consumer has the money to pay those costs. 

US regulator sounds alarm about reverse mortgages (Reuters)

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  • This guy is behind the times and smoking crack…..everything he states already exists. These bureaucrats need to read their laws before they crack open their pie holes. indiot.

  • Interesting observation from a man who oversees banks, many of which are going out of business weekly, or have been bailed out with BILLIONS of taxpayer dollars. This man is obviously an authority on what steps to take to alleviate financial disasters. I wonder what specific regulations he proposed to prevent the under capitalization of bank reserves for losses earlier this decade?

    I fail to see the similarities between reverse mortgages and sub-prime loans. Proprietary RM’s were conservative in their underwriting and principal limit factors. The only threat to those loans is the insolvency of the banks, which Mr. Dugan does such a superlative job of overseeing.

    As far as impounding, perhaps the comptroller can provide some statistics on how many seniors with reverse mortgages are delinquent on their property taxes or are uninsured due to lack of payment.

    It may be advisable for Mr. Dugan to attend a counseling session before trying to draw comparisons between rotten apples and oranges.

  • Just what is needed — more regulation from more regulators.

    Since when were RM proprietary loans like subprime? The primary market for subprime was lower valued homes. The primary market for proprietary (other than Homekeeper) were upper end.

    While I agree with stronger enforement on marketing and cross selling, it seems like well meaning advocates for seniors are stepping into unfamiliar territory and may just destroy this budding market.

  • Put a politician on a podium and he will find evil and make populist claims of dire doings in anytrhing. Ask Dugan to explain this statement:

    “which he said bear significant similarities
    to the type of subprime products that helped fuel the housing
    boom and bust, resulting in a widespread credit crisis and
    recession.” from the article, I hope a misquote.
    -and he will squirm out of it, I think. But, as usual the harm has already been done.
    Too bad there aren’t regulations penalizing politicians for purposeful erroneous statements, then the shoe would be on the other foot (kicking them in the a..).

  • dduck could stand for Daisy Duck. Be careful, Critic, as you always are.

    I was shy because I am not a member of your industry, and hence a guest, but these lawmakers and politicians are really getting to be too much. Besides, as far as I am aware, there is not as free wheeling a forum for financial professionals, and because you have but one product, you are more focused.
    (Remember Erika needs help.)

  • James, you are right on, as usual. Too many cooks and all that…

    I must say that I am suprised that nobody mentions teaching Dugan about Reverse mortgages! Obviously the guy doesn’t know much about them, because the more one knows about reverses, the more intriguing they become! We all remember when we first learned about this product, and it wasn’t the easiest thing to understand. Once we “got it”, we loved it, and wanted to educate the seniors and their families about it. Really, anyone who would listen, right?

    Why not Dugan? It seems to me that we, who know Reverses well, ought not to crab and lay blame, but should act, on behalf of seniors and quite possibly the future of this product, to make sure these “heads of office” know how their decision will really effect real people.

  • just another nudge pushing me away from ever working in the mortgage intustry again after 20 years. The OCC was asleep at the wheel since the RTC/Savings and Loan crisis. Now what, are they trying to show they’re even relavent?

  • New word in Webster’s Dictionary:

    Obamitization: (Obam-itization) government pinheads taking control and over-regulating all aspects of private industry
    (Lat.-socialism)

    It’s just starting!!!

  • Subprime HECM
    1) Liar’s loan Government-backed loan
    2) State Income No Income requirement
    3) FICO quasi-dependent FICO independent
    4) No mortgage insurance Mandatory MIP
    5) Monthly payments Monthly payments optional
    6) Higher than average Lower than average initial
    initial interest rate interest rate
    7) Recourse loan Non-recourse loan
    8) Upon sale responsible Upon sale responsible for
    for 100% owed max 95% of value of home
    9) Plunges borrower into Saves borrower from fore-
    foreclosure closure
    10)When rate adjusts upward When rate adjusts upward
    payments also go up no payments required

    I could go on but you get the point . . .

    Yup, lotsa similarities. Feel free to add yours.

  • I’ll try again:

    Subprime HECM
    1) Liar’s loan // Government-backed loan
    2) Must “state” Income // No Income requirement
    3) FICO dependent // FICO independent
    4) No mortgage insurance // Mandatory MIP
    5) Monthly payments // Monthly payments optional
    6) Higher initial rate // Lower initial rate
    7) Recourse loan // Non-recourse loan
    8) Can cause foreclosure // Saves from foreclosure
    9) Higher rate=higher payment // Any rate=no payments
    10)If sell repay all // If sell repay 95% of home value

    I could go on but you get the point . . .

    Yup, lotsa similarities. Feel free to add yours.

  • Typical Obama socialist politician – making statements about things they know nothing about – cannot run the U S Post Office profitably but think they can run General Motors – stupid is as stupid does

  • This is my impression of Mr. Dugan: It is too much to expect a stupid person to recognize the extent of his own stupidity.

    If he knew what he was talking about and possessed intellectial capabilities, he would not have made those incorrect statements.

  • If you want to know how Obama will manage the banks and the auto industry, just call the national 800#s of Social Security, Medicare, or the Internal Revenue Service and ask a question about your account. You will quickly know Obama’s managerial abilities.

  • dduck,

    Thank you for bringing the link to the Zickefoose story to the attention of all of us. Both in helping a senior in real need and in bringing positive press to our industry, Mr. Smaldone has accomplished something for this senior, other seniors, and the industry as a whole. Kudos, Mr. Smaldone.

    Wells Fargo has once again shown its real character. It is a bank with an insignificant loan operation for seniors, called reverse mortgages. This can be observed in the testimony of Mr. Stumpf before Congress where he boasts that WF has never issued one negatively amortized mortgage. Some might call this “old news” but it clearly shows the mind set in WF management that holds true all throughout their non reverse mortgage (and at times in the reverse mortgage) operations. New (?) news would be that Mr. Stump apologized to Congress and retracted his prior statement, citing its reverse mortgage operations and the really marvelous things it does for seniors. The fact that such a retraction is not readily available or publicized shows WF and its management has the same mindset “yesterday, today, and” until they run out of TARP monies. Such a statement by Mr. Stumpf might even have a positve influence on people like Mr. Dugan.

    Many of us may be in awe of the truly magnificent retail reverse mortgage operations of WF but that is less than 3% of its overall operations. Losing it would mean little to overall WF operations. However, WF is little more than an overgrown regional bank with trouble absorbing the Wachovia acquisition. Both Wells and Bank of America made a lot out of having to accept TARP monies but neither has stepped forward to return it like other banks did this morning.

    WF could have and should have done much better, much earlier in the Zickefoose case. Hearing stories like this one and that of Mr. Conn shows the real situation at WF. It is hoped that the reverse mortgage division at WF will have a deeper and more positive influence at WF now and in the future but one has a hard time envisioning such dramatic change while Mr. Stumpf is still at the proverbial helm. “Old habits die hard.”

  • Mr. Dugan should have learned more about the program before he proved he is a fool who knows nothing about it. The politicians are regulating this program out of existance. It is a wonderful program that does wonderful things for borrowers and literally saves lives. I am so tired of “overnight experts” who know nothing about RM and do not bother to educate themselves and then shoot off their mouths about how bad it is. We have been fighting this mentality for years.

  • Thank you dduck for the link to Mr. Dugan’s comments.

    After reading all, two things are obvious to me, one, is that despite the safeguards currently in place, Mr. Dugan feels that seniors are incapable of understanding the telephone book of disclosures that we provide them, he may have a point. Perhaps another 30 pages of disclosures will clarify the first 80 pages they receive now. He also believes that despite attending a counseling session with a trained counselor, seniors are still confused. Therefore, if they are ambulatory they should be required to drive to the nearest HECM counselor, pay the $125 and receive counseling in person. Therefore, the program is not only expensive, but inconvenient.

    Lastly, Mr. Dugan is a big fan of impound accounts. As a banker, I suppose this is a popular choice. I will take a guess to say that Mr. Dugan envisions impound accounts being set up similar to SFSA’s, with several thousand dollars being removed from access by the homeowner, and held by the trusty bank for future payment of property taxes and insurance. In his comments, Mr. Dugan refers to the significant risk of loss of the seniors home due to lack of planning on their part to pay taxes and/or insurance.

    My question remains, how many homeowners have lost their home to lender foreclosure for failure to pay taxes or insurance in the twenty years of the HECM program. I doubt we’ll ever see the number, and I also doubt that Mr. Dugan has this information. Therefore, this is a straw problem, in that it is not prevalent and is not in need of correction. Merely a talking point to solve another problem that does not exist. Good to know that the banking system is completely secure and the OCC has nothing better to do.

  • Mr. Dugan talks about consumer protection in regard to reverse mortgages, what about all these lenders that will forclose on these seniors without a second thought. People who have lived in their homes for 30,40,even 50 years. How about making these lenders accept the partial payments that some of these seniors send in rather than the lender sending it back because it is not the total amount. Is this in the best interest of the senior?? If Mr. Dugan can tell me about another program that can save a senior from foreclosure without ever having to make another mortgage payment again then maybe I will listen. He also needs to realize how passionate we, as reverse mortgage originators are about our seniors. We will work months and months and go above and beyond the call of duty to get a short payoff approved so that we can see that senior stay in their home. How dare he compare us to subprime!!!!!

  • After actually going to the OCC website (via the link provided by dduck, thank you), then linking to Mr. Dugan’s actual “Remarks”, I don’t think he’s quite the idiot, or socialist, or whatever, some commenters are saying he is.

    I also don’t think he’s trying to regulate the RM out of existence. Specifically, he seems to be referring to proprietary products and that they should have the same type of stringent regulations that the HECM already has.

    I do disagree with his opinion that impounds should possibly be required, I would point out that senior homeowners have been paying their taxes and insurance for the length of time that they’ve owned their homes, which is usually substantial, and it does them a disservice to assume that they will stop just becaue they have gotten a reverse mortgage. In many cases, the RM is what can allow them to continue meeting the expenses of home ownership and maintenance, either by providing the money to do so, or by increasing their cash flow to allow for necessary expenses.

    As far as his reference to RMs being similar to sub-prime mortgages, it is spelled out in the Remarks page: “some of the similarities to the risks of subprime mortgages: a vulnerable customer class; complex product features that can be difficult to explain and can be susceptible to deceptive marketing; nontraditional, asset-based underwriting; and the potential for skewed incentives for key distributors of the product.” I don’t disagree with any of these, do you? And one of my concerns has been for quite a while the operations of originators that appear to be in this business solely for the income, and that seems to be the type of lender that has “the potential for skewed incentives”.

    I do appreciate RMD bringing us information like this; it’s a really easy way to stay on top of what’s happening in our industry. But it’s important to note that RMD postings are usually a brief synopsis of the item, and before we get up in arms, it can pay to dig a little deeper. Isn’t that what we want the regulators to do? Learn more before spouting off about our beloved and precious industry? Some of us need to take our own advice.

  • RM Originator

    Couldn’t have said it better myself. There are fewer and fewer “idiots, fools and socialists’ out there than we think.
    However, it is hard to refute them without all the facts. Dugan’s speech was to bank compliance people, so I would not expect him to talk about the LA Lakers and The Magic.
    Having seniors writing to these politicians about having paid their insurance and taxes for decades will impress them more than raving about their politics.

  • Critic

    As long as Dugan is not a fool or idiot, perhaps his gaps in RM education can be filled to the benefit of the RM industry and ultimately the “seniors”. In the mean time, to your point, perhaps the Zickefooose article can be gotten to him.

  • Most comments are on the money. Interesting there is reference to non-FHA reverse mortgage, commonly known as proprietary products. To my knowledge, I have not seen any those products in the marketplace for quite some time.

    The HUD response at the end of the article seems to drive home the point that there are plenty of safeguards in place now for HECMs. Hopefully, the OCC will call on HUD’s expertise before jumping into the arena of the world of “Uninted Consequences”. Our senior homeowners deserve to maintain their dignity and peace of mine.

  • RM Originator,

    You state: “As far as his reference to RMs being similar to sub-prime mortgages, it is spelled out in the Remarks page: ‘some of the similarities to the risks of subprime mortgages: a vulnerable customer class; complex product features that can be difficult to explain and can be susceptible to deceptive marketing; nontraditional, asset-based underwriting; and the potential for skewed incentives for key distributors of the product.’ I don’t disagree with any of these, do you?”

    Yes, as an originator and former auditor, I respectfully disagree.

    One cannot speak to risk without addressing the environment in which it is found. For example, even though the type of risk is the same (loss of money), the similarity in leaving a twenty dollar bill on a chair in a restaurant to the risk of leaving one in your safe deposit box at a state of the art bank and expecting to find each bill in the place they were left one month later is more dissimilar than similar.

    Based on the example, do you think the banker would agree that the risk is similar? Even if President Obama made such a claim, I believe the banker would say: “Sir, I respectfully disagree. The risks are more dissimilar than similar.”

    Before going on, here is the entire sentence you were quoting: “In sum, consumer compliance risks with reverse mortgages are real, and indeed, I am struck by some of the similarities to the risks of subprime mortgages: a vulnerable customer class; complex product features that can be difficult to explain and can be susceptible to deceptive marketing; nontraditional, asset-based underwriting; and the potential for skewed incentives for key distributors of the product.” From everything I can find, these were prepared remarks.

    Not once in his speech did Mr. Dugan address why he makes the claim that the risks are similar. Do you really believe that the risk to seniors today in getting a reverse mortgage is similar to the risk to a borrower getting a subprime loan at any time in history? What about having the complex features of the loans explained; are the risks really similar especially in light of reverse mortgage counseling? The reason why subprime went to asset-based underwriting is the high risk of default. And there is the subprime problem of high LTVs. Almost all reverse mortgages today are government insured was that true of subprime? Then the last item is a potential.

    Mr. Dugan proposes counseling for proprietary products at the same level as HECMs. Well, last I remember in 2008 all proprietary lenders did just that without the help of Mr. Dugan. Then he shows his lack of understanding at one point by saying “the loan is usually non-recourse.” In the last five years which reverse mortgage was not non-recourse?

    Sir or Madam, I respectfully disagree with Mr. Dugan.

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