In U. City hearing, McCaskill raises questions about reverse mortgages
This article first appeared in the St. Louis Beacon, June 30, 2009 - Sen. Claire McCaskill, D-Mo., on Monday expressed concerns about the potential for predatory lending and fraud in the growing reverse mortgage industry and recommended revamped federal standards.
McCaskill, who presided over a field hearing of the Senate Special Committee on Aging at the OCHS Senior Center in University City, also warned of misleading advertising and excessive fees for the loans, which she said are extremely complex and difficult to understand.
"As we all know, many seniors are more vulnerable than the average population; they may be lonely or afraid or have diminished capacity,'' McCaskill said in an opening statement. "They are trusting and believe in the integrity and honesty of others who may not have their best interests at heart. We have a responsibility to make sure vulnerable seniors are not preyed upon, and we should not create mechanisms that allow this to happen."
Reverse mortgages are loans that allow homeowners age 62 and over to convert equity in their homes into cash. Borrowers don't need to repay the loans as long as they live in their homes and maintain them.
Reverse mortgages remain a bright spot in the collapsed mortgage industry. The majority are insured by the Federal Housing Administration through its Home Equity Conversion Mortgage (HECM) program. The numbers have exploded -- from 7,757 in fiscal year 2001 to 112,148 in 2008.
HECMs are sold by private lenders and then purchased by Fannie Mae, accounting for more than 90 percent of the reverse mortgage market. The rest are privately sold, or proprietary, mortgages, which are not insured by the FHA.
McCaskill suggested that because HECMs are insured by the federal government, private lenders have no risk because taxpayers must foot the bill for failed loans.
The Department of Housing and Urban Development requested nearly $800 million in its budget request for fiscal 2010 to cover potential losses on reverse mortgages because of declining housing values.
Anthony Medici, special agent in HUD's office of inspector general, testified that a provision in the 2007 Housing Economic Recovery Act increased the vulnerability to fraud by raising the limit on reverse mortgages from $362,790 to $625,500.
Other witnesses testified that lenders sometimes use dirty tricks to convince seniors to get reverse mortgages they don't really need -- or to pay fees that are not required for the loan.
A new study by the Government Accountability Office found that some private lenders make misleading claims about reverse mortgages in marketing materials, including claims that they are "government benefits," said Mathew Scire, GAO director of financial markets and community investment. He also described a pamphlet that promised "lifetime income," although payments end when a homeowner leaves the home.
Medici said that some predatory lenders convince seniors to spend their loan money on deferred investments like annuities.
Witnesses said there are safeguards to protect HECM borrowers, including mandatory counseling with an independent housing counselor before they can sign the loan.
Peter Bell, president of the National Reverse Mortgage Lenders Association, said that there have been few complaints about reverse mortgages filed with state attorney generals, bank regulators or the Federal Trade Commission owing to the safeguards, including the mandatory counseling.
"In fact, I don't think you could come up with any business in America in which every potential customer is referred to an independent third-party specialist," Bell said.
But Scire said that when the GAO sent undercover investigators to evaluate 15 counselors, none covered all of the federally required information.
Bell also said that market forces make it difficult for lenders to predict the closing price of a mortgage. Even after locking in an interest rate, it can take six to 10 weeks to close a HECM, and by that time the rates can change dramatically. Sometimes, as a result, lenders beat the break-even level, and sometimes they don't.
Jeanne Wilkins, 62, of University City, said the hearing left her with unanswered questions and she still doesn't feel comfortable about getting a reverse mortgage.
"It is very confusing,'' Wilkins said.
In her closing remarks, McCaskill advised seniors to shop carefully and to do thorough research. She also said to remember the adage: "If it sounds too good to be true, it usually is."
Reporter Mary Delach Leonard contributed to this article.
Puneet Kollipara, an intern at the Beacon, is a student at Washington University.