Misleading Marketing Tactics Could Turn Reverse Mortgages Into a New Financial Bubble

The Senate Special Committee on Aging, chaired by Sen. Claire McCaskill (D-Mo), recently held a hearing on reverse mortgages to discuss lax oversight that some say could expose seniors to predatory and fraudulent practices and eventually lead to another widespread financial meltdown.

A government report discussed at the hearing also cautioned against some cross-selling of annuities in reverse mortgages.

A reverse mortgage is a loan available to people at least 62 years old who own their own residence. It converts a portion of the equity in their home into cash without having to move out of their main residence or repay the loan every month. It can provide cash to help seniors pay for medical or any other expense.

Unlike a traditional home equity loan or second mortgage, a reverse mortgage is available regardless of the borrower’s current income level – even if the borrower doesn’t have any. In addition, the repayment for loan is not required for as long as the borrower (or one of the borrowers) continues to use the home as principal residence and keeps taxes and insurance current.

Since 2001, the number of reverse mortgage loans has increased by 1,500 percent. The number of seniors that have taken reverse mortgages in 2008 was estimated at 100,000 – representing more than $17 billion in home equity. Ninety percent of the loans are issued through the federally insured Home Equity Conversion Mortgages (HECM) program.

In a TV interview prior to the hearing, McCaskill said not all seniors may be aware of the complexities of the product’s terms and costs when they take out a reverse mortgage. If these loans go bad the government and taxpayers are on the hook, she said. Taking advantage of seniors could create another subprime mortgage mess where all of us have to pay for something that shouldn't have ever occurred, cautioned McCaskill. 

“I am deeply concerned about these issues,” McCaskill said in her opening statement at the hearing. “We have a responsibility to make sure vulnerable seniors are not preyed upon and we should not create mechanisms that allow this to happen.”

In addition, McCaskill warned against predators of a different nature. “These persons target the very program itself, trying to game the system in the same fashion that has caused the turmoil in our housing markets,” she said. “Like the subprime market, lenders and originators in the reverse mortgage market reap large commissions but face very little risk while writing these mortgages.

“This is because nearly all reverse mortgages are insured by the Department of Housing and Urban Development (or HUD),” the senator explained. “Once the value of the loan reaches the value of the home, lenders assign the loan to HUD who then becomes responsible for the difference in the loan amount and the fair market value of the home. This leaves the program vulnerable to fraud schemes, like flipping and the recruitment of sham buyers.”

Daniel Claggett, who testified at the hearing on behalf of the National Consumer Law Center,  noted that securitization, which allowed subprime loan originators to disassociate themselves from the downside risks of abusive lending, is becoming more commonplace in the reverse mortgage industry.

“The same market forces that rewarded volume business with huge profits in the
subprime market are growing in the reverse market,” according to Claggett. “Mortgage brokers, who once reaped profits from subprime and exotic loans are now turning to reverse mortgages.

“The subprime mortgage crisis was driven by profiteering among all players in the
industry and without regard to its impact on the lives of millions of Americans saddled with inappropriate mortgages,” he said. “It is important to act now to save our seniors from the same scourge. We cannot wait until millions of elderly homeowners have been victimized to address the problems we know already exists.”

In his testimony before the committee Mathew Scire, director in Government Accountability Office’s Financial Markets and Community Investment Team, said federal agencies need to be vigilant about emerging consumer protection risks, particularly in the areas of HECM marketing.

In a limited investigation, the GAO found some marketing material to be “inaccurate, incomplete or employed questionable sales tactics.”  The claim of "lifetime income," for example, is potentially misleading because there are a number of circumstances in which the borrower would no longer receive cash advances, Scire testified.

“Never lose your home” is another potentially misleading claim. If the HECM borrower did not pay property taxes and hazard insurance or failed to maintain the house, the lender could foreclose on a borrower’s home.  Some claims falsely imply that HECM loans are limited to a certain geographic area – a residence is “located in a Federal Housing Authority qualifying area” – is one case.  Others statements such as “must call within 72 hours,” or “deadline extended,” give the impression that consumers must respond within a certain time to qualify for the reverse mortgage.

Another concern is the limited role of federal agencies in addressing "inappropriate cross-selling." Cross-selling typically involves the sale of insurance products. The sale of some types of financial products, such as an annuity that defers payments for a number of years, in conjunction with HECMs may be unsuitable for seniors, the GAO report said. While financial professionals receive high fees the victims are unable to get access to their savings for many years or even past their projected life expectancy in the case of annuities.

HUD is responsible for restricting inappropriate cross-selling but the agency is still in the preliminary stages of developing regulations. Some prospective borrowers may not be receiving the information necessary to make informed decisions about obtaining a HECM because of these weaknesses, according to GAO.

The GAO recommended that the concerned federal agencies should take appropriate steps to strengthen oversight and enhance industry and consumer awareness. These steps include developing guidance to help bank examiners identify marketing claims, incorporating discussion of these claims in consumer education materials and reviewing advertisement and taking the appropriate follow-up actions.

“I am not denying that there are entrants to the reverse mortgage business who’d we all be better off without. Every business has its share,” Peter Bell, President National Reverse Mortgage Lenders Association (NRMLA), told the committee. However, he said that no one has identified any incidence of widespread wrongdoing and misconduct specifically in reverse mortgage cases has been “virtually very little.”

Bell said companies making reverse mortgages across the country are largely properly motivated, responsible and whose top priority is servicing seniors. He enumerated the steps taken by the NRMLA that support consumer education, ethics, self-enforcement, and professional development programs such as:

• Educational seminars that routinely focus on issues like understanding seniors’ finances; recognizing cognitive impairment; reporting suspicions of elder abuse; understanding Medicaid, Medicare and SSI; and other topics that help NRMLA members understand the client base with whom they work and how best to serve their needs.
• A professional designation program, under which candidates must meet licensing and professional education requirements, participate in a symposium on ethics issues, undergo a background check, and pass a rigorous exam.
• Developing a straightforward, uniform disclosure that will summarize in a succinct, comprehensible format all of the salient facts about a reverse mortgage that a prospective client might be considering, allowing the consumer to easily compare various offers side-by-side.

Bell cited its Ethics Committee as “the most active disciplinary force in the reverse mortgage business.”  The Ethics Committee is where complaints are filed, investigated and action taken, if necessary, he explained. “We have sanctions of our own that we are able to impose, plus we are able to report cases to the proper governmental authorities for their action.”

“I would like to reiterate that there is a highly consumer-centric industry here looking to help seniors monetize the equity in their homes so they can live more comfortable, secure and fulfilling lives,” Bell testified. “We are committed to only making loans after a homeowner makes an informed decision that the reverse mortgage is a tool appropriate for their needs.”