Reverse mortgages: Subprime mess déjà vu?

Reverse mortgages are increasingly the go-to solution for retirees confronting insufficient nest eggs and paltry income payouts in today’s low-rate environment. Last year, the number of new Home Equity Conversion Mortgages insured by the federal government amounted to 112,000 -- more than 14 times the HECMs that were originated in 2001. The 2009 tally is expected to be even higher.

Last week’s news that 2010 Social Security benefits will not be given a cost-of-living adjustment -- for the first time since inflation protection was added to the program in 1975 -- will likely fuel demand for reverse mortgages. And lenders on the prowl for post-meltdown revenue sources are eager to boost the supply. The Government Accountability Office reports that 1,500 lenders made their first reverse mortgage in 2008, more than doubling the number of lenders offering these deals.

When done right, reverse mortgages can be a sound financial tool for retirees. But problems abound, as Donna Rosato laid out in "Beware the reverse-mortgage ripoff."

Comptrollor of the Currency John Dugan certainly didn’t soft-pedal his concern in a June address to the American Bankers Association. “While reverse mortgages can provide real benefit," he said, "they also have some of the same characteristics as the riskiest types of subprime mortgages—and that should set off alarm bells.”

The bell is being rung again, this time by the by the National Consumer Law Center in its new report: "Subprime Revisited: How Reverse Mortgage Lenders Put Older Homeowners’ Equity at Risk."
The acknowledged problems in the reverse mortgage market strike me as prime fodder for proponents of establishing a Consumer Financial Protection Agency. Just take a look at the main recommendation made in a recent GAO report on the reverse market:

“To enhance consumer protection from potentially misleading marketing, we recommend that the Secretary of the Department of Housing and Urban Development; Chairman of the Federal Trade Commission; Chairman of the Federal Deposit Insurance Corporation; Chairman of the Board of Governors of the Federal Reserve System; Comptroller of the Currency, Office of the Comptroller of the Currency; and Director of the Office of Thrift Supervision, take steps, as appropriate, to strengthen oversight and enhance industry and consumer awareness of the types of marketing claims that we discuss in this report.”

That’s quite an alphabet soup of players with a hand in the game. Yet given the problems that continue to exist, it’s clear the current quilt of oversight has some serious holes. Holes a Consumer Financial Protection Agency might be well-suited to patch.