WAPO: Reverse Mortgage Market Has No Resemblance to Subprime Marketplace

image Washington Post contributor Jack Guttentag writes in his latest column that Reverse mortgages are not the next subprime.  He adds that:

For reasons not clear to me, reverse mortgages are being bad-mouthed by an unlikely source: consumer groups that are supposed to represent the interest of consumers in general, and seniors in particular.

Pointing out that an AARP survey found that 93% of HECM borrowers said their reverse mortgage had a mostly positive effect on their lives, compared with3% of borrowers who said the effect was mostly negative.

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Despite the positive reactions from borrowers, Guttentag writes that some advocates in consumer organizations are bad mouthing the program. 

Specifically he addresses the Consumer Reports “investigative report” on reverse mortgages as well as the National Consumer Law Center’s report titled "Subprime Revisited: How Reverse Mortgage Lenders Put Older Homeowners’ Equity at Risk."

He writes that NCLC report is a major source for the “nonsense” claims that growth of the reverse-mortgage market has major similarities to the growth of the subprime market, and could lead to the same kind of "financial fiasco."

Reverse mortgages are not the next subprime

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  • It is certainly a very positive article even if it is inaccurate. We need to work with authors like this to create a wave of positive and accurate articles about HECMs. I greatly appreciate the efforts of Mr. Guttentag to provide a balanced picture of HECMs.

      • A statement is either accurate or inaccurate. Let us look at five different examples.

        1. “Reverse mortgages are for seniors who don't have enough spendable income to meet their needs but do have equity in their homes.” There are far more reasons seniors get a reverse mortgage. This is the old and inaccurate thought that reverse mortgage supplements or replaces spendable income. It does far more.

        2. “So long as he pays the property taxes, maintains the property and doesn't change the names on the deed, he can remain in the house forever…. Their only obligations are to maintain their property and pay their property taxes….” Twice the issue of paying insurance premiums is overlooked.

        3. “…not roomers, which was what the husband had made himself into. The correct moral is that the program should not be misused.” Was this case a misuse of the HECM program? Hardly, at worst it was false information conveyed by the originator and not challenged by the counselor. At best the money was absolutely needed, the homeowners took a willing gamble that the proceeds from a refinance would be sufficient to payoff the HECM when the husband came onto title, and the husband is expressing his exasperation that they lost by misrepresenting the facts in his case.

        4.” But reverse-mortgage borrowers assume no repayment obligation at all….” We all know that this is absolutely a wrong statement.

        5. “In contrast, no lenders have suffered or will suffer losses on HECMs because they are insured against loss by the FHA.” This is completely false. If the crossover point has not been reached, all proceeds have been taken out of the loan, and the senior cannot pay past due property taxes and insurance is due, someone suffers loss.

  • Read the article and appreciated the distinction the author made between “bad mouth” and “educate.” It is the issue I have had with a fair amount of the reporting done on reverse mortgages in the current climate and his analysis of the Consumer Reports article as part of the former practice is spot on as far as I am concerned.

  • When the HECM program was first set up in 1989,the over riding concern
    at HUD was family members of Seniors taking out a Reverse Mortgage
    would object and they worried about the reaction.
    Every poll taken by AARP, Reverse Mortgage Lenders and governmental
    agencies have recorded strong, almost universal approval by family members.
    HECM is the balm of comfort for many Seniors who desperately want to
    provide for themselves. Along with Social Security and Medicare, HECM
    goes a long way to help people sustain themselves by employing an
    imaginative redistribution of their own wealth. Bob LaFay
    Reverse Mortgage Consultant

  • Professor Emeritus Jack Guttentag of the prestigious Wharton School of Finance has an outstanding Mortgage Website; I have had communications with the Professor and received permission to reprint some of his work, which I pass on to Seniors. The man has forgotten more about mortgages
    in the last five seconds than I would ever know in my lifetime. What a blessing to have him a believer in the FHA HECM.

    • James,

      You are spot right on point. Of course Mr. Guttentag gave away part of his bias when he highlighted New View Advisors, LLC. Joe Kelly, one of the owners, is a Wharton grad.

      That reference also reveals a weakness in his analysis. Personally, the outlook of the New View regarding the HECM program has a lot of hype and propaganda resulting in vindicating their own positions on various issues benefitting their top line revenue. Of course that is nothing new in business. Some call that effective marketing.

  • Nice to see a postive article…Cynic, you missed the most obvious and glaring one. The last line of the first page of the article….”There are no reverse-mortgage foreclosures”

    • Peter,

      You are right.

      I was limiting my response to five examples. I thought anyone in the industry would have detected that one. Rethinking it, if TMS did not see “any,” TMS certainly didn't see that one. I have others.

  • The HECM does share a couple of characteristics with now-defunct subprime mortgages: ease of converting equity in the home to cash, no income or asset verification, the assumption rising property values would preserve equity. What is not the same? Subprime loans had limits on negative amortization and eventually required an amortizing payment; HECMSs don't.

  • What do you mean, HECM_DUD: No asset varification. What is an FHA Appraisal, may I ask? As far as assuming rising property values, I would remind you that since 1929, even considering the Great Depression and all the other smaller recessions figured in, real estate values in the United States have have had average annual growth rate of 4%, one side of the FHA HECM equation.

    • James,

      As to the 4% appreciation rate, you are spot right on point.

      It would have been good if the Administration had recognized the 4% rate rather than forcing a 3% appreciation rate down the throat of HUD in the budget process. It was REALLY surprising Congress ignored that fact in the appropriations process. The Administration has a lot of rookies making rookie mistakes, but Congress?

      However, HECM_Dude is right on the asset issue. If lenders are using other assets in their analysis of providing a mortgage, not having that information verified is a gamble.

  • James,rnrnAs to the 4% appreciation rate, you are spot right on point.rnrnIt would have been good if the Administration had recognized the 4% rate rather than forcing a 3% appreciation rate down the throat of HUD in the budget process. It was REALLY surprising Congress ignored that fact in the appropriations process. The Administration has a lot of rookies making rookie mistakes, but Congress?rnrnHowever, HECM_Dude is right on the asset issue. If lenders are using other assets in their analysis of providing a mortgage, not having that information verified is a gamble.

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