New State Bills Surrounding Proprietary Reverse Mortgages

The Washington state Capitol, one of the states where a new reverse mortgage bill has been introduced.

Last week, we discussed the proposed reverse mortgage bill in Arizona. Today, we would like to highlight three other states where bills regulating proprietary reverse mortgages have been introduced in the last month. The three bills differ dramatically from each other.

The California bill aims to protect seniors from being lied to and/or misinformed, including a lot of regulations surrounding impartial HUD counseling. Some highlights of the California Reverse Mortgage Elder Protection Act of 2009 include requiring lenders to provide prospective borrowers with a list of all approved HUD counselors in the state, requiring lenders to disclose any business relationships or potential conflicts of interest with the counseling agency to the prospective borrower, and allowing the borrower to cancel the reverse mortgage for any reason within the first 30 days. This bill apparently addresses the needs of the state, where seniors have been found to be misinformed or misled regarding reverse mortgages more often than in some of their neighbors.

Minnesota’s new bill addresses the issues of fraud and double dipping. It too seeks to ensure that lenders do not provide reverse mortgages to seniors who do not need them.

One of the key facets of the bill is that it prohibits cross selling involving reverse mortgages. The bill will also require mandatory counseling for proprietary reverse mortgages. There appears to be a lot of skepticism as to whether it is possible to ever really prohibit cross selling. However, it seems valuable to state that lenders cannot also sell annuities or insurance to the borrower if the payments will come from the reverse mortgage. Trust is a crucial aspect of the reverse mortgage program, and double dipping has the potential to undermine that trust.

The Washington bill protects both the lender and the consumer from eachother. The bill appears similar in some ways to the Arizona bill by mandating counseling. It requires basic protections, ensuring that there is a right of recession and that the payments go to the correct party. However, the bill is also notable because it adds provisions for the lender, helping to confirm that the lender can afford to make the payments in the reverse mortgage and that they are held accountable if they do not. The Washington bill appears to be designed to prevent court cases and help provide guidance to the courts in determining disputes. It also is likely to serve as an important step in protecting seniors in the proprietary reverse mortgage market–especially since one only needs to be 60 to qualify for a proprietary reverse mortgage in Washington State.

These bills continue to show the increased interest the states have been taking in regulating the proprietary reverse mortgage market during the recession. Reverse mortgages can help seniors and improve their lives. On the other hand, there also instances where getting a reverse mortgage may prove to not be the right thing for the senior and their family. Taking steps to protect the senior while helping to prevent lawsuits is a good thing. It is valuable that the states have gotten involved in regulating a market that is so at risk for fraud and manipulation.

New Bill in Arizona Aims to Protect Proprietary Reverse Mortgages

The Arizona State Capitol Building

A new bill that just passed the House Banking and Insurance Committee in Arizona will seek to grant protections to reverse mortgages carried out by proprietary lenders. While many federal regulations are already in place to protect senior citizens applying for reverse mortgages, these regulations do not automatically apply to proprietary lenders, who are not insured or regulated by the federal government. While the federal cap on reverse mortgages is $625,000, a proprietary reverse mortgage may allow a homeowner to get more money for their home (though often with higher fees). Although loans regulated by the federal government account for 90% of all loans, the proprietary market is growing rapidly, especially as the economy gets worse and the interest in reverse mortgages rises. As a result, it makes sense that states would choose to extend the federal regulations to all reverse mortgages in the state.

The decision is even more sensible in Arizona, where “uninsured” reverse mortgages are still available in some areas. An uninsured reverse mortgage generally only provides monthly advances and must be repaid in full on a specific date. Since uninsured reverse mortgages do not offer the protection of reverse mortgages (i.e. you can lose your home), it is perhaps even more important for the state to ensure that lendees know what they are getting themselves into.

While there are counterarguments to many of the protections offered by the federal government, for example mandatory counseling by an impartial third party and written disclosure of all the terms and details of the mortgage, these protections help to inform the lendee of the terms of their mortgage. They therefore are basic, helpful requirements, especially in the unregulated world of proprietary loans.

As we have discussed, mortgage fraud is on the rise. Proprietary reverse mortgages are especially subject to fraud on the part of the lender, due to the fact that they are not regulated or insured by the federal government (if at all). If Arizona passes this bill, it will hopefully be a strong step towards protecting lendees from predators who may not have their best interests are heart. The bill will also help ensure that reverse mortgages are safely available to all those who qualify.

Reverse Mortgage Fraud Part 3: And The Verdict Is…

Protect your identity. Fraud rates are increasing.

We knew that the mortgage fraud was occurring. We imagined the number was increasing, but we never knew by how much… until now. The Philadelphia Inquirer published a story today noting that mortgage fraud increased by 26% in 2008 vs. 2007. Application fraud accounted for 61% of the reported incidents. The article specifically cites identity theft as being a source of fraud in reverse mortgage applications, allowing applicants to appear older (or perhaps younger) than they might otherwise be for the purpose of securing a better loan.

While these numbers include more than just reverse mortgages, they help provide factual support to the conclusion that mortgage fraud is more prevalent now than it was during the real estate boom. Both lenders and mortgagors should use caution to make sure they do not become another statistic. The growing marketplace means more avenues are available to those wishing to commit mortgage fraud–regardless of which kind of mortgage the mortgagor wishes to take out.