Reverse Mortgages: Destined to be the Next Subprime Meltdown?

By glblguy


Reverse mortgages are suddenly coming under fire. But these unique loans remain an effective and at times essential financial option for seniors across the country – and they’re proving more popular than ever.

One of the federal government’s banking regulators this week warned that reverse mortgages may soon need greater oversight and scrutiny. John C. Dugan, Comptroller of the Currency, compared reverse mortgages in part to subprime mortgages, claiming some of their similar risks should “set off alarm bells.”

In short, a reverse mortgage allows homeowners to convert parts of the equity in their home into cash payments that can be taken as a lump sum, in monthly installments or through a line of credit. These mortgages are for senior citizens who either own their home or have a low mortgage balance. The Federal Housing Administration insures about 90 percent of all reverse mortgages in the United States.

That penetration rate that worries regulators like Dugan, who fear taxpayers may wind up on the hook because of the risks associated with reverse mortgages. Dugan’s office issued a press release that spelled out some of his concerns, which included “the ability of consumers to access their home equity through immediate and large lump sum payments.”

He also expressed concern that seniors can be “particularly vulnerable to coercive sales of annuity and long-term care insurance products that are expensive and may not be appropriate to their needs.”

While these concerns are certainly valid, reverse mortgages are on the rise. Federally insured reverse mortgages increased almost 20 percent in March and April, the Wall Street Journal reported this week. The U.S. government backed 11,660 reverse mortgages in April, its highest monthly total ever.

Much of the increase is linked to the down market, as senior citizens continue to search for ways to keep their retirement savings intact.

This was a guest post by Brandon Laughridge. Brandon is a mortgage blogger with Mortgage Loan Place. MLP specializes in educating consumers about Home Loans and FHA Loans. If you would be interested in writing a guest post for Gather Little by Little, feel free to contact me.

5 Responses (including trackbacks) to “Reverse Mortgages: Destined to be the Next Subprime Meltdown?”

  1. DRamon Says:

    What I have seen is that seniors are uable to sell their houses in this bad market and so take out a reverse loan. I wonder what happens to a young senior if they outlive their reverse mortgage?

  2. Workin' from Home Says:

    “But these unique loans remain an effective and at times essential financial option for seniors across the country – and they’re proving more popular than ever.” Why don’t you just have the Big, Bad Wolf guest post about the glories of little girls carrying picnic baskets alone in the woods? A reverse mortgage is a terrible financial product unless you are the one selling it. Seniors would be better off to get a regular mortgage and make payments out of the loan proceeds.

  3. Chris Leow Says:

    Well I don’t know much about America, but we in Malaysia are booming thanks to China ! We in Malaysia are enjoying high growth and high inflation, I do not understand all this complaining. We have to thank China for our strong growth as our economy was going down until March 2009 and China rescued us by buying our commodities. Currently there is strong job market, 2 jobs for every worker, we have to import in foreign labour to do jobs that locals do not want to do ! We have high inflation, an example is a local dessert called “cendol” selling for $1.20 in local currency a month ago, is now selling for $ 1.80 in local currency. Thats a hefty increase, so don’t complain, enjoy the boom !

  4. MyJourney Says:

    @ Work from Home,

    If the product wasn’t useful to someone out there, it wouldn’t exist.

    Reverse mortgages may provide a senior with steady (partially insured) income for the rest of their life, and the company can not then go and foreclose on the home (like with a regular mortgage option you assumed correct).

    No, I do not work for a reverse mortgage company, I am just saying learn before you bash.