Subprime revisited: how reverse mortgage lenders put older homeowners’ equity at risk

This paper claims that the consumer protections built into the old reverse mortgages programme are being eclipsed by the drive to exploit senior home equity by major banks and insurance companies, among others. The paper indicates that this push threatens the financial well-being of America’s seniors due to its maximised loan volume that targets senior homeowners. Particularly, it believes that the greatest threat looms over millions of low-income seniors with significant amounts of home equity.

The paper points out that the need to access to their built-up equity can make homeowners especially vulnerable to bad advice from brokers and loan officers. Low-income seniors are also vulnerable to predators selling overpriced and inappropriate financial products and services.

Accordingly, the paper finds that federal and state governments must act now as follows:

• to ensure that reasonably priced and fairly structured reverse mortgages are available for those who truly need them
• to prevent the reverse mortgage boom from becoming a reprise of the sub-prime failure

To that end, the paper recommends the following changes:

• create a suitability standard for all reverse mortgages and equity conversion products
• forbid yield spread premiums in reverse mortgage transactions; these premiums are payments from lenders to brokers in exchange for the broker selling the borrower a loan with a higher interest rate than the borrower could have received
• regulate private equity conversion products such as proprietary reverse mortgages and shared equity agreements
• implement data collection on reverse mortgages and other equity conversion products, considering the scarcity of publicly available information on reverse mortgage originations and reverse mortgage borrowers