Are reverse mortgages the next big financial mess?

I don’t pay much attention to people who claim to foresee the next financial mess. But I listen up when the warning comes from one of the nation’s top bank regulators.

Comptroller of the Currency John Dugan got my attention Monday when he urged greater consumer protection for reverse mortgages:

“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.”

Yikes. Reverse mortgages are designed typically to help those 62 and older tap the equity built up in their homes without having to leave/sell the home or make regular payments on a loan. Most are federally insured “home equity conversion mortgages.”

Dugan’s worry centered on the growth of private reverse mortgage products and three basic concerns:

The reverse mortgage creates a “pot of cash” and seniors might be pressured into putting that money into risky investments, perhaps as a condition of getting the loan.

Seniors needing the cash may overlook stiff fees attached to the loan

Older borrowers may be the target of misleading marketing claims.

Read the whole speech here.

The Minnesota Attorney General earlier this year saw some tougher laws on reverse mortgages. Gov. Tim Pawlenty vetoed the legislation, saying it could increase costs and availability. Earlier this year, though, the AARP was warning of scams linked to reverse mortgages.

So it’s not necessarily the product, which has helped keep thousands of older people in their homes by creating a cash flow based on their home equity. It’s the ancillary problems that can spring up when potentially vulnerable people are suddenly sitting on a pile of cash.

I saw this first hand as a business reporter during the 1990s in the Southeast when some banks began aggressively marketing mutual funds, annuities and other products that, unlike deposits, were not federally insured.

Very nice, otherwise savvy people signed their names to investment products that weren’t appropriate for their age or carried extremely high ownership costs. There was little outright fraud but the banks essentially used the bedrock trust people placed in them to market products to older people who thought they were buying something like a CD or something else that was federally insured.

You can debate who’s at fault in those instances. But let’s hope we don’t relive those episodes as the population ages. The Federal Trade Commission has a good page on reverse mortgages and your options.

If you’ve had a recent experience with a reverse mortgage or are looking into one for yourself or a family member, we’d love to hear about your experience. Click here and tell us what you’ve seen.

And check out the map below for stories people in our Public Insight Network have told us recently about housing issues in Minnesota.

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