McCaskill, NCLC call for new reverse mortgage rules

These loans could be options for predatory lenders seeking new profit.
Megan Stroup / Graphic Designer

Sen. Claire McCaskill, D-Mo., and a major consumer rights group held a conference call Tuesday to ask for more regulation on a new type of home loan they said could be as destructive to the economy as subprime mortgages.

In the call, McCaskill and the National Consumer Law Center said predatory lenders have moved from the subprime market and are now seeking profits in a special market targeting seniors with reverse mortgages.

"We've seen this movie before and it didn't have a pretty ending. Abuses in the subprime lending market almost brought down our economy," McCaskill said. "Now we're seeing similar abuses with reverse mortgage lending. Something needs to be done before more lifesavings are depleted and more tax dollars are drained."

Reverse mortgages are a special type of loan made to homeowners older than the age of 62. Homeowners can take out a loan against the value of the house they have already paid and receive that money as a cash lump sum or monthly payments. They do not have to pay the loan back; instead it is paid with proceeds from the sale of their home when they die or move out.

The NCLC specifically called for a ban on yield spread premiums. Many reverse mortgage buyers find their loans through a broker, who they hire to find them the best deal. But the NCLC said banks also pay brokers a fee to set buyers up with more expensive loans, called a yield spread premium.

The number of reverse mortgage loans made in Missouri ballooned during the housing bubble, as equity grew with rising home prices. In 2005, only 454 such loans were made statewide, according to data provided by the National Reverse Mortgage Lenders Association. By 2008, that number had risen nearly five-fold to 1,933.

NCLC spokesman Rick Jurgens said the recession has left banks looking for new ways to make up for lost revenue. He said banks now sell several different types of loans using jargon understood only by those in the banking industry. Just as lenders used such jargon to sell subprime loans to unsuspecting homebuyers, Jurgens said lenders would use the terms to make such loans more appealing to seniors.

"It can come in a lot of different forms and that's one of the daunting things about these types of loans," Jurgens said. "The few people who completely understand these types of financial products should have an obligation to make sure there isn't a cheaper option for seniors."

Brenda Procter, a state consumer and family economics specialist for the MU Extension, said rising health insurance costs among the growing senior population could be one reason for the sudden rise in loans. She said seniors usually cash in on their homes when they feel they have run out of other financial options.

"I feel like usually that should be the last red flag and red flags that big usually relate to health insurance bills," she said.

Peter Bell, president of the National Reverse Mortgage Lenders Association, said most seniors are satisfied with their loans. He said banks rarely pay brokers with yield spread premiums and said the loans do not need more regulation.

"They are relatively rare in the reverse mortgage market," Bell said. "I think it's clear from the things said at the conference that the NCLC and Sen. McCaskill don't entirely understand how reverse mortgages work."

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