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Business Costs & Regulation

Congress Eyes Crackdown on Reverse Mortgages

Buyers should always beware, but seniors looking at reverse mortgages will soon get a little help from Uncle Sam, too.

Abuse of reverse mortgages will prompt Congress to tighten the rules surrounding this increasingly popular loan product targeted toward seniors. Scrutiny on reverse mortgages ought to help borrowers avoid unscrupulous dealers, but it will also create fresh headaches for even the most careful lenders, many of whom are struggling to stay afloat.

Reverse mortgages were created as a way for people 62 and older to turn their home equity into retirement income. They allow a homeowner to borrow money, paid to them – often on a monthly basis -- with no payback required until the homeowner passes away or moves out. The loans can be attractive because borrowers are guaranteed that they’ll never have to pay back more than their home is worth, no matter how long they live and draw payments.

Reverse mortgages can be a big help to seniors who need more cash coming in after they stop working. And there are a lot more in that category today. The stock market losses of 2008 put a big dent in many a nest egg, leaving lots of seniors with smaller interest and dividend checks and less savings to draw upon in a pinch.

The problem, according to critics, is that some lenders are taking advantage of seniors by luring them into loan terms without explaining what can be high costs and long-term consequences. “That leads to a number of problems for seniors,” says Tara Twomey, counsel with the National Consumer Law Center. “We are going to see their equity drained away by brokers and lenders.”

Aggressive lenders and a growing number of retirees have boosted growth in the reverse mortgage market to more than 100,000 this year from about 43,000 in 2005. The aging population means “we now have a lot of borrowers eligible for reverse mortgages,” says John Courson, president of the Mortgage Bankers Association.


Another potential problem involves falling home prices. The federal government guarantees about 95% of reverse mortgages, so if home values fall below the loan amount, that could mean a bigger deficit.

Lawmakers who don’t want to see problems mount will insist on tougher enforcement measures. Sen. Claire McCaskill (D-MO) is readying a bill now that would boost funding for borrower counseling and tighten reverse mortgage rules. “Something needs to be done before more life savings are depleted and more tax dollars are drained,” said McCaskill in a statement.

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