US Regulator Worries Proprietary Reverse Mortgages Could Be Next Subprime Product; Encourages More Regulation

 

John Dugan's comments on reverse mortgages have shaken the industry.

John Dugan

In a story that made headlines yesterday, top US bank regulator John Dugan announced that he is concerned that reverse mortgages could be the next subprime mortgage product to experience rapid growth.  Like subprime mortgages, reverse mortgages are complicated loans that appeal to a vulnerable segment of the population.  However, Dugan’s concerns are not centered on the 90% of loans secured by Fannie Mae. Rather, he is concerned about proprietary products, sensing an opening for those who wish to prey on seniors.  

The Regulator’s remarks were partly to encourage other regulators to set standards for proprietary reverse mortgages. He also encouraged the regulators to be vigilant in cracking down on misleading marketing materials and lenders engaging in cross-selling. Dugan added that the Office of the Comptroller and Currency, where he is the top regulator, is prepared to step in should additional measures be needed.

As a result, Dugan’s comments should not be viewed in such a negative light. His point was that by acting early, regulators can hopefully prevent the next subprime crisis.  His comments are in line with much of the state legislation that we have seen in recent months.  Therefore, rather than scare people away from reverse mortgages, the Regulator’s fears should help skew prospective borrowers towards the FHA products, and otherwise help ensure that the proprietary market is regulated so that all reverse mortgage borrowers are protected.

 

Minnesota Governor Vetoes Reverse Mortgage Legislation

 

Minnesota Governor Tim Pawlenty

Minnesota Governor Tim Pawlenty

Minnesota Governor Tim Pawlenty vetoed the SF 489 on Thursday, the Reverse Mortgage legislation that was being debated in the state legislature there.  Pawlenty wrote that while he agreed with the goal of the legislation, it might have the unintended consequence of making reverse mortgages less available in the state of Minnesota and increasing the costs.  Governor Pawlenty also felt that the suitability criteria as defined in the bill was too vague, and asked the bill’s authors for greater specification in order to avoid unnecessary litigation.

The vetoing of the bill is a positive step, avoiding vague legislation, and helping to ensure that the goal of protecting consumers does not prevent the product from being available or accessible.  In addition, Governor Pawlenty’s acknowledgement of the many benefits of a reverse mortgage and support of the product are other positive signs for the reverse mortgage industry.