Are reverse mortgages the next trouble spot?

Filed in archive mortgage news on June 8, 2009

I've learned not to necessarily trust everything that mortgage professionals say. But that's because I've been covering the mortgage and real estate industries for more than a decade now.

I can see why others, though, might listen intently to what mortgage loan officers tell them. Say you're a first-time home buyer. You're undoubtedly thrilled and excited. You just need that right mortgage loan to get into the home of your dreams. If your mortgage loan officer tells you to consider an adjustable rate mortgage, one whose interest rates could jump sky-high after, say, five years, you'd probably be apt to listen, right? After all, the mortgage loan officer is supposed to be the expert.

What if you're a senior citizen and a loan officer tells you that a reverse mortgage loan is the right choice for you? You might listen again, right? Because, again, the mortgage loan officer is the expert, the pro. That loan officer is supposed to be watching out for you. That's what the loan officer is paid to do.

Unfortunately, it doesn't always work that way. Loan officers are not above pushing inappropriate mortgage loans on borrowers.

A top U.S. banking official agrees. John Dugan, the U.S. comptroller of the currency, was quoted in a recent Wall Street Journal story as saying that reverse mortgages could be the next financial product to cause serious problems for consumers. In the story, Dugan calls for legislators take action to prevent reverse mortgages from causing some of the same problems for homeowners that subprime loans have already caused.

Reverse mortgages are popular these days. They let homeowners 62 or older convert a portion of the equity in their homes into cash. Unlike a traditional home equity loan or second mortgage, though, reverse mortgages require no repayment until the borrowers no longer use the home as their principal residence.

In the Wall Street Journal story, Dugan says that taxes and insurance costs for reverse mortgages should have to be escrowed to guarantee that consumers have the money to pay those costs. Dugan also recommended that consumers considering a reverse mortgage receive in-person financial counseling.

Is Dugan right? Are reverse mortgages, favored by so many older homeowners, yet another ticking time bomb? Like I said, I've covered the mortgage industry for a long time now. I've seen other ticking time bombs explode. I wouldn't be surprised to see reverse mortgages join them.