SACRAMENTO, CA -- If you thought the lending debacle killed subprime mortgages, you may not realize that reverse mortgages are also a subprime product. U.S. banking regulators predict reverse mortgages could experience huge growth.
Director of the Office of the Comptroller of the Currency John Dugan says regulators are now developing guidelines for these mortgages that allow homeowners to live off the equity of their homes. The overwhelming majority of people who are in the position to have enough equity or even have their homes paid off completely are seniors. In fact, to qualify for the mortgage the homeowner has to be at least 62 years old.
Most reverse mortgages are insured by the Federal Housing Administration and are not a threat to a person's credit. But Dugan said there is one type of reverse mortgage called "proprietary" that offers less protection to homeowners. "I believe the critical lesson here is the need to act early, before problems escalate," said Dugan.
As America's elderly population increases, the demand for reverse mortgages and along with them the proprietary reverse mortgages could increase as well. Regulators fear proprietary reverse mortgages have many similarities to the subprime loans that created the housing boom and then housing bust.
"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. He added that regulators need to set more standards for proprietary reverse mortgages and as well exert more vigilance about misleading marketing.
It will be essential he said 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.
News10/KXTV