Reverse mortgages are still safe

To hear Sen. Claire McCaskill talk about federally insured reverse mortgages, you'd think the popular program is riddled with fraud and victimizing older Americans and costing the government billions.

Not to worry. Your reverse mortgage is safe, and so is the 20-year-old program that has insured such loans for more than 500,000 older homeowners, including 112,000 last year.

The government, AARP, Kiplinger (the business forecast and personal finance advice publisher) and others, still recommend the federally insured reverse mortgages as a good deal if you're at least 62, have sufficient equity in your primary residence and need a cash cushion.

Nevertheless, McCaskill, a Missouri Democrat, has been crusading for two years to clean up what she called at a June hearing in her home state, a "program that is leaving our seniors vulnerable to predatory practices leading to fraud and victimization."

While the industry acknowledges there are some problems with some agents' sales pitches and insufficient counseling of borrowers, government auditors have found scant evidence of fraud in the market for the most popular reverse mortgage, the Home Equity Conversion Mortgage (HECM). It is tightly regulated by the Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD).

At the June 29 hearing of the Senate Special Committee on Aging, of which McCaskill is a member, she said, "The patchwork of regulation that is supposed to protect seniors and taxpayers has left both uncovered, resulting in a recent request by HUD for an additional $800 million of federal funds to cover losses that I had warned about."

But that's less than eight-tenths of 1 percent of the total of FHA insured loans, $105 billion, according the HUD inspector general.

For the first time, HUD has requested the $800 million for 2010, to cover possible losses based on assumptions that the value of some insured homes may have declined and are worth less than the mortgage. If the loan expires when the home is vacated, FHA would be liable for the difference and would protect the lender against loss. The homeowner-borrower that McCaskill worries about would not be liable.

I asked McCaskill's office for specific cases of fraud. McCaskill presented witnesses at the hearing, several of whom suggested that the lucrative reverse mortgage market was becoming a target for deceptive advertising, with misleading sales pitches. But no cases of fraud were cited in the HECM program. Daniel Claggett of the National Consumer Law Center warned that the reverse mortgage market could become a target for subprime lenders, who helped precipitate the crisis in conventional mortgages.

But FHA rigidly enforces strict guidelines for approving an HECM for only the most creditworthy primary residences. A Government Accountability Office report noted that there have been relatively few complaints about HECMs. One potentially misleading sales claim, according to the GAO, said the borrower "never owes more than the value of your home." But now, with declining home values, the total cost of an HECM's loan, interest and closing costs could exceed the value of the property, and it would fall to heirs to pay off the loan, if they wish to keep the property.

One complaint at the hearing involved a private reverse mortgage, which has no government guarantees. Two witnesses complained that homeowners were cheated by repair people because HUD requires properties be brought up to standards before a loan can be approved. The problems seemed to be the fault of the contractors, not the lender.

The most prevalent problem in the HECM program, according to the GAO and Peter Bell, president of the National Reverse Mortgage Lenders Association, is inadequate counseling of some prospective borrowers. Counseling is required by HUD before a loan is approved. Counselors are supposed to tell homeowners of the disadvantages and total costs of an HECM, as well as the advantages and alternatives.

The administration, HUD officials and lenders have sought to further tighten the HECM program. At the hearing, Bell said that, despite the potential for fraud, his organization has polled state law enforcement officials, and "no one has identified any incidence of widespread malfeasance specifically in reverse mortgage cases."