John Dugan, who heads the Office of the Comptroller of the Currency and is a top U.S. Bank regulator, supervising some of the nations largest banks, said that Reverse Mortgages could be the next subprime market. Reverse mortgages are experiencing tremendous growth while taking advantage of a vulnerable segment of the population. The focus of the regulators are now set on crafting tighter guidelines to ensure that consumer protection laws are in place for reverse mortgages.
Dugan went on to add, during an address to the American Bankers Association, “While reverse mortgages can proved real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages – and that should set off alarm bells.” A majority of reverse mortgages are insured by the FHA but proprietary reverse mortgage products, which are backed by private investors, offer less consumer protection.
Dugan feels that as the elderly population continues to grow there could be a significant pickup in demand for proprietary reverse mortgage products that may result in having similar subprime attributes. This type of lending could end up creating a reverse mortgage housing boom, which if not monitored, could have significant longer term implications. Dugan followed up by stating, “I believe the critical lesson here is the need to act early, before problems escalate.” Similar to what we have learned from the past, not having enough regulation and focus on proprietary products, could trigger a crisis of its own. One such example of not having enough regulation is that currently taxes and insurance are not mandatory escrow items, thus a borrower can take out a reverse mortgage and still end up loosing their home, which would also hurt the borrower.
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