08 October 2009

The next shoe to drop: reverse mortgages

Alarm bells are beginning to sound about the reverse mortgage industry. As I’ve long suspected, these reverse mortgages aren’t nearly as “safe” as many have believed. It is very interesting, that the articles coming out about the growing problems with reverse mortgages don’t really make it clear who is going to suffer. Bloomberg, for example, talks about this as a potential consumer problem, but doesn’t really specify how that would be.

Ironically, it is the consumer that may well have the last laugh when it comes to reverse mortgages. If property prices actually plunge below levels that lenders had thought possible, it is the banks that will take it on the teeth. The seniors who have taken out the reverse mortgages have basically guaranteed that they won’t lose more than a fixed amount on their own homes, regardless of how far prices crash. It is the poor lender who is going to suffer when it comes to selling the property to be made whole when the borrower passes away.
Risks that contributed to the collapse of the subprime- mortgage market also are a concern in the sale of reverse mortgages, said John Dugan, head of the Office of the Comptroller of the Currency, at an American Bankers Association conference in June.
“While reverse mortgages can provide real benefit, they also have some of the same characteristics as the riskiest types of subprime mortgages -- and that should set off alarm bells,” Dugan said.