Consumer interest in reverse mortgages is growing, which is good news for the lenders underwriting the loans and for the brokers originating them but not for the seniors targeted or for the credit unions getting aggressively recruited to help market the product.

What's so bad about these mortgages? Here's a hint: The folks promoting them are the same finance professionals who helped create the subprime mortgage mess, and they're using the same business model: large commissions for originators, outsized fees for lenders, and high costs and outsized risks for borrowers. We've seen how this approach worked out for subprime loans, and there is no reason to expect a different outcome for reverse mortgages.

Reverse mortgages aren't new. They were introduced more than 25 years ago as a vehicle that would allow house-rich-cash-poor seniors tap the equity in their homes to provide the funds needed to age in place. But that original concept, which viewed reverse loans as a last resort for a relatively small pool of seniors, bears little resemblance to the loans that are being marketed today as a lifestyle option, appropriate not just for some seniors but for all, and intended not to cover essentials, but to finance luxuries seniors can't otherwise afford, or (even worse) to provide funding for investments that seniors shouldn't be financing with home equity and probably shouldn't be making at all.

A Good Deal?

As the name suggests, reverse mortgages work in reverse: instead of making payments on the loan borrowers receive payments from it. Interest accumulates and compounds over the loan term, and the loan is repaid when the home is sold. Marketing materials emphasize three features that make the loans particularly appealing to seniors:

The loan pays you.

The buyer of your home or your heirs will repay the loan; you won't have to.

You can live in the house forever. The lender can never foreclose.

What these marketing materials don't emphasize, and what many seniors don't understand, is that once the available equity has been tapped, the loan payments will cease. That lifetime occupancy promise won't mean much to an owner who no longer has the resources to cover basic living costs or the unanticipated expenses seniors incur as they age.

The no foreclosure guarantee isn't entirely accurate either, because failure to pay the homeowners insurance or property tax bills violate the mortgage note, providing grounds for the foreclosure that borrowers are assured will never occur. These are just some of the problems with reverse mortgages, taken from a long list that includes:

The loans are expensive–much more costly than lines of credit or home equity loans, which are viable and preferable options for many of the borrowers who obtain reverse mortgages.

The loans are complicated, which makes it easy to sell them to vulnerable elders.

Reverse mortgage borrowers need, but don't often receive, the comprehensive in-person counseling and long-term resource planning assistance the loans require.

Reverse mortgages deplete equity. That's what they are designed to do, but this essential point is often downplayed or ignored. As a result, seniors do not always ask and answer this crucial question: Where will you go if you can no longer live independently, and what financial resources will you have available to finance those living costs if you no longer have equity in your home?

They Want You!

It is easy to understand why the brokers and underwriters who were pushing subprime mortgages a few months ago are pushing reverse mortgages today, but why are they trying to enlist credit unions in their sales campaigns?

One of the former subprime lending giants answered that question in a recent reverse mortgage pitch to credit unions, explaining with rare and probably unintended candor: “As seniors, family members, and advisers become more familiar [with and accepting of] reverse mortgages, they will seek out companies whom they can trust. By partnering with us, you can further expand your role as a valued and trusted resource.”

Translation: We want to offer reverse mortgages through credit unions because your members trust you more than they trust us. The lenders and brokers promoting the loans are trying to wrap themselves in the cloak of credit union credibility because they know borrowers are less likely to question these highly questionable loans if they come from credit unions the borrowers trust.

But trust, as you know, is a precious commodity–hard to build but frighteningly easy to lose. The brokers and lenders who want to be your reverse mortgage partners are asking you to put your credit union's hard-won credibility on the line in exchange for the opportunity to earn a point or two–$3,000 to $6,000 on the average $300,000 loan. Does that sound like a good deal or a fair exchange to you? Does it sound like a risk you should be willing to take?

Credit unions pride themselves on putting members before money, but it's hard to apply that claim to reverse mortgages. The promotions inviting credit unions to climb aboard the reverse mortgage train don't talk about the benefits for borrowers; they talk about the opportunity for credit unions “to create a new profit center.” They announce that “yield spread premiums are now paid” on FHA-insured reverse mortgages. And they promise expense-paid vacations to credit unions for simply referring qualified reverse mortgage borrowers, which sounds an awful lot like a RESPA violation to me. But regulatory concerns aside, any loan promoted based on the commissions it generates for originators is the last product a credit union ought to be offering its members. That's why credit unions said no to subprime mortgages, and you should say no to reverse mortgages for the same reason–because they aren't good for your members.

Make no mistake: The primary force behind the growth of reverse mortgages is the same force responsible for the subprime boom and bust. You've seen how the daisy chain of brokers, lenders, Wall Street money managers and investors created one crisis. Don't let them use credit unions to create another one.

Instant Insights /

Beware: Reverse Mortgages Can Be Dangerous for You and Your Members

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