US Regulator’s Speech About Reverse Mortgages Brings Up Legitimate Concerns

image Earlier this week at the American Bankers Association’s Regulatory Compliance Conference in Orlando, Fl, Comptroller of the Currency’s, John Dugan gave a speech about the need for “Consumer Protections for Reverse Mortgages”.

When the press got wind of a few parts of the speech, the headlines started hitting national papers like the Wall Street Journal, Washington Post, Reuters, and more.  However, if you read a copy of his actual speech, he brings up a lot of good points.

During the speech, he points to how the record levels of foreclosures and losses on subprime loans resulted from a combination of risk factors which include:

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a vulnerable customer segment; complex product features that were ineffectively, and sometimes deceptively, disclosed to customers; nontraditional underwriting that was heavily based on the value of the collateral, rather than the borrower’s ability to repay; skewed incentives of key distributors of the product; and finally, a distribution chain that was heavily populated with nonbanking companies that were not subject to comprehensive supervision.

He stresses that everyone needs to learn the right lessons from this very negative experience, because it clearly demonstrates the link between compliance and safety and soundness.

Later in the speech he said, “consumer compliance risks with reverse mortgages are real, and indeed, I am struck by some of the similarities to the risks of subprime mortgages”.  Why are they similar? 

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. 

Now I don’t know about everyone else, but I’ll admit that he has a point.  I don’t think he is saying that reverse mortgages are subprime loans, but showing how they share many of the same risks.

He then goes on to say that now is the time to confront these compliance issues before real problems develop so that reverse mortgage providers make these loans in a way that is prudent for both lenders and borrowers.  Everyone who is in the business should agree with that statement.

After reading the speech a couple times his issue isn’t with reverse mortgage products in general, but it’s with proprietary reverse mortgages.  Even thought the HECM product is the dominant force in the marketplace today, many (including myself) think the industry will see most of its growth from proprietary products.

As more and more states propose reverse mortgage legislation, I’d rather be ready with a set of guidelines ready to go, instead of letting them draft their own protections  which end up banning proprietary products like the legislators in Vermont.

While I might not agree with everything he said in his speech, his concerns are legit.

“Consumer Protections for Reverse Mortgages” “Consumer Protections for Reverse Mortgages” jry1938

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  • I, for one, learned a general rule(actually a forgotten one: try to put an original quote in its original context. In this particular case Dugan’s speech. I had forgotten how much derivative articles can become distorted.
    “Man bites dog” sells papers.

  • I can see where he is coming from. However, I think that referring to vulnerable is far fetched. These clients are far from vulnerable. Vulnerable would indicate that these clients roll over and accept reverse mortgages like they did subprime loans.

    Truth be known, the reverse mortgage is a very difficult product to sell to Seniors. It took us almost a yr to figuere out how to effectively deliver this sale to Seniors and it still has its difficulties.

    I think these people are overreacting! For a product that only 11k a month got done on it’s best month when these Seniors are in a financial crunch, I think that may be overreacting a bit.

    This is not subprime, these folks have equity, there homes are insured by FHA, and Seniors and everyone around them tell them to enter this product w/ caution.

    Back off Regulators and let us help these people!!!!

  • Mr. Dugan is not a villain or the bad guy but his speech indicates several things. First he wants mandatory impounding of taxes and insurance on HECMs. Then he insists seniors would be better off with fact-to-face counseling.

    Mr. Dugan also declares that reverse mortgages are usually non-recourse loans. What reverse mortgage is recourse? Sure many of us are bothered by the new interpretation of non-recourse by HUD but still fundamentally even under the HUD new interpretation, a HECM is non-recourse.

    It is troubling Mr. Dugan points to subprime and declares that reverse mortgage risks are similar to subprime. While Mr. Dugan is right to point out that several areas of concern are similar, the risks themselves are not. Some may claim this is too much nitty picky stuff but that is why Mr. Conn is so upset. He found out that nitty picky does add up.

    Some hope that if Mr. Dugan and his department get regulations in place to regulate proprietary RMs, state law proposals will fall by the wayside. Some of us think of this as unrealistic optimism. The real problem is that few state laws reach national bank operations even when those banks are operating inside of those states.

    Here are some questions for those who advocate impounds: First, how many years of impounding are needed? Should they work like service fee set asides based on amortization principles? How many RM borrowers annually are having their RM payoff accelerated because of the inability to pay insurance and taxes? How many of those individuals would never have been able to get a RM if they had had to have these amounts escrowed at closing? How many borrowers in the last twelve months would not have been eligible for a RM had the escrow rule being advocated by Mr. Dugan been in effect?

    While face-to-face counseling may be helpful, it hardly seems necessary. Mr. Dugan did not make a compelling case why it should be returned. I think a far more compelling case can be made for originators having mandatory face-to-face interview with the borrower in the home of the borrower.

    My conclusion is that Mr. Dugan needs to find out much more information about reverse mortgages before he begins authorizing regulations. Not surprisingly some appear to feel otherwise.

  • Admin:
    “I don’t think he is saying that reverse mortgages are subprime loans, but showing how they share many of the same risks.”

    That’s like saying I’m not an axe murderer but I share many of the same characteristics. Got my point. As someone stated yesterday I am appalled that subprime loans and reverse mortgages were used as a comparison in any context.
    I will not go on because Mr. Veale states all my concerns above.

  • It is very difficult to make a decision, for a year, I have been evaluating this option as it looks the perfect one for me “disable 1,200 SSS check and 700 mortgage plus utility and the others” looks as the perfect option, but my search for inf. only scarred me of going at head with this action, however, if I dont’, I may loose my home and the addtional income from renting part of it.

    Please, give a simple and direct advise, we are old but I believe must of us can understand a clear non selfish advise. On a simple explanation:
    Which are Positive and Negative results of this action,
    Is the secure, Are we protected, If I choose to cancel the loan will I h ave enought to paid and have some balance for me…

  • I think the main problem here is Mr. Dugan being incompletely quoted. His actual comments on HECMs were positive, however, the article which appeared in my local paper, from Bloomberg Press, only focused on the negative aspects of the “proprietory” loans. I have written a letter to the editor, to point out the incompleteness and implied inacuracy of Bloomberg’s piece.

    I would like to encourage everyone to write a letter to the Secretary of HUD urging him to start doing PSA’s to enlignten the public to the positive benefits of “his” program.

  • Ms. Pichardo

    If you have not already sought independent free financial counseling, perhaps you should. Depending on where you live, some communities have non-profit (they don’t sell anything) financial counseling services. You can check your telephone book and call your Congressperson’s office and your local state representative for additional help.
    I have never dealt with them, but one national organization that I found, by using Google, was Greenpath. http://www.greenpath.com/about/locations.htm
    I’m sure there are other organizations in your area: try to contact them.

  • My feel is that there is a lot of concern due to the “rush” in the growth of the product. No one can deny that the Reverse Mortgage has gone from unknown to one of the most popular product in the US in a VERY short time.

    I have always had concens about the taxes and insurance issue. Admin had a great article a while back titled “T&I, The Family Secret” (something like that). He nailed it on the head. Industry veterans have seen this issue for a long time and everyone has turned a blind eye to it.

    Why?

    Becuase it is a HUGE ISSUE!!!! Probably the largest in the industry, and I have yet to hear a good solution.

    Do you escrow for the life of the loan? That would make a great deal of previously eligible senior, ineligible.

    Do you let it ride as is? This is fine as long as the values always go up for padding when a senior defaults. However, we all know that the “always goes up” theory doesn’t hold water.

    I won’t even consider foreclosing on seniors an option here, so what can we do?

  • Rosa,

    I agree with your statement,”we are old but…” While there will always be “bad apples” in the bunch, after 14 years in the business, I would say that most Reverse mortgage loan officers really do go out of their way to make sure their senior is protected.

    You can go onto this link and enter some information and get an idea of what you are eligible for with a Reverse, but the numbers won’t be as accurate as they would if you had a Loan Officer run them for you on their software. http://rmc.ibisreverse.com/default_nrmla.aspx

    Educating and offering the senior what’s in their best interest is the mantra of all good Reverse mortgage loan officers. I also think that seniors are not given the credit they are due. After all, they’re old, but intelligent and able to make their own decisions. This is their money and they should be able to do what they want without so many obstacles trying to “protect them from themselves”. And with regards to what started this, which was the article on the son who ripped off his mom, there are jerks everywhere! We cannot control that; nobody can. And who are we to dictate morality? The counselor is possibly going to be the person who reviews the borrowers financial situation and determines whether they should have a Reverse mortgage? Please tell me we are not handing the borrower’s freedom to choose to a HUD Counselor, of all people.

    This program is not for everybody, but for those who need or want it, it’s an excellent financial tool, and sometimes even literally a lifesaver. The down side is that the kids won’t get the house, more than likely. However, the kids have houses of their own, they don’t have the money to cover their parent’s bills, they don’t want their parents to move in with them, and the parents don’t want to live with the kids! What other program can literally change whole lives like this one!

  • Subprime loan could made borrowers lose the home, but not the Reverse mortgage, they can stay in the house till the last day of life gauranteed, that is the big differences of the subprime loan and Reverse mortgage!!

  • Jim Veale makes excellent points as usual. Still, I don’t think that Mr. Dugan should get the benefit of the doubt because he was only pointing out similarities between the sub prime product and reverse mortgages. That’s like pointing out there are similarities between the flu and cancer. What’s the point, aside from symptoms there they are distinctly different for reasons others have cited.

    The volume and scale of reverse mortgages will never approach anything like the sub prime example. The HECM product is as stable as anyother FHA loan. As for other proprietary products like the Jumbo, their existence depends entirely on investor support. Given the parameters of a reverse, that support is negligible, especially in tight markets as we have seen. It is doubtful that investors will run to drive these options any time soon given the volatility of home valuations as well as the superior return derived from other mortgage based products.

    While precautionary steps must be taken to insure the integrity of reverse mortgages, Mr. Dugan’s analogies serve no real purpose and are as misguided as his notion of establishing impound accounts.

  • I have to agree with John Brodey. Not only do Dugan’a analogies serve no positive purpose, they are actually counterproductive because they are adding to the heap of hysteria, misinformation, and myths about reverse mortgages that we have to fight every day. I don’t need this – I already spend most of my time on client education as it is. I am happy to do it, because once the client understands the reverse mortgage, I have found that they are able to make their own rational decision about it. And, once they have the reverse mortgage in place, I get “thank you” notes. But, headlines such as those generated by Dugan’s speech scare people to death and keep them from seeking the help that the reverse mortgage can provide them. Also, I have to think that if typical “forward” mortgages including subprimes had always been as fully disclosed as reverse mortgages and subject to borrower counseling, the economy wouldn’t be in quite the mess it is in today. I think they are trying to fix something that isn’t broken – the attention is needed elsewhere.

  • My sense is that if a RM loan officer had a presentation to a senior home owner, and the techniques of characterization of a reverse mortgage were similar to his comparison of RM’s to subprime loans, someone would be screaming that the loan officer’s presentation was full of misrepresentations and slight of hand leaving the loan officer’s audience misdirected and misinformed.

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