Regulator: Reverse Mortgages Similar to Subprime Loans

June 8, 2009 No Comments »


The Office of the Comptroller of the Currency warned today that reverse mortgages, growing in popularity over the past few years, pose significant compliance risks that must be addressed early.

“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,” Comptroller John Dugan said in a statement.

Reverse mortgage underwriting is considered “nontraditional” because no repayment is required on the loans until the homeowner sells the home, passes on, or fails to pay property taxes (what is the definition of a reverse mortgage?).

But providing the elderly with large sums of money can also lead to widespread abuses by mortgage lenders, who may attempt to condition loan approval on the purchase of annuities and other investment products.

“Another risk is that reverse mortgage borrowers, because they have no immediate repayment obligations, may overlook substantial fees that are attached to the loan,” Dugan added.

“And consumers who spend their loan proceeds quickly or unwisely may end up short of the funds they need for home maintenance or property taxes, with disastrous consequences: the failure to make those payments can result in foreclosure.”

Dugan is looking to bolster regulations for reverse mortgages, including imposing additional requirements with respect to escrows of taxes and insurance, for which nonpayment can trigger foreclosure.

“We need to be on constant alert to emerging risks and vigilant in our regulatory compliance responsibilities,” he concluded.

The OCC said 90 percent of all reverse mortgages are insured by the FHA, referred to as Home Equity Conversion Mortgages.

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