The mortgage mess of ... 2012

Posted by: Dean Foust on May 25, 2007

I’ve got a prediction of what will be the mortgage disaster five years out: Reverse mortgages. Why would I say that? Because of these comments from top mortgage industry officials, who believe that a number of those subprime mortgage brokers — Reverse_Mortgage.jpgthe same folks who put unqualified borrowers into “no doc/stated income/option ARM” mortgages that are quickly turning sour — are seeking employment in the reverse mortgage arena, which is viewed as a growing niche over the long term, as millions of elderly homeowners with vast amounts of equity into their homes but less-than-adequate savings look to milk the equity out of their homes to pay for their golden years. Can you see the same subprime brokers who hustled elderly people out of their home with a 13% option ARM no-doc loan now doing the same to your parents with a reverse mortgage with thousands in hidden fees and charges and an interest rate that’s way above market? No, these loans won’t default — they can’t — but they could result in a lot of elderly being put into improper, expensive loans they don’t understand.

If you aren't familiar with reverse mortgages, they are loans that provide the homeowner with a regular income stream, which is drawn as the mortgage company effectively transfers the equity from the homeowner to themselves.

I'm not a big fan of reverse mortgages. The loans are complicated, and the complexity is usually designed to hide the fact that the fees and effective interest rates are high, something that isn't obvious because the fees are sometimes paid out when the loan is closed out. They're no bargain, and should only be viewed as an absolute last resort for elderly homeowners needing cash. BusinessWeek has written a couple of stories explaining the ins and outs of reverse mortgages, which can be found by clicking here and here.

Reader Comments

rich

May 25, 2007 12:29 PM

Dean, you are correct that the reverse mortgage business is a disaster waiting to happen. But most of its victims won't be elderly people. The victims will be mortgage lenders. Many elderly people will actually be beneficiaries.

Dean, imagine that your grandmother took out a reverse mortgage two years ago for 80% LTV. Now, with housing declines, it's at 100% LTV. She lives another 10-15 years, accruing negative amortization each year at 9%. Then, she either dies or mails in the keys. Assuming modest appreciation, the lender is going to lose more than half of the loan value. Grandma gets to live for more than a decade rent free. There's nothing the lender can do to move her out, either. She doesn't even have to repair the property. She can just let it run into the ground, if she wants.

David A. Porter

May 25, 2007 8:40 PM

Dean,

Did you get out of the wrong side of the bed? The bottom line, in my humble opinion, in that it is too easy to get into the mortgage business.

You can be a shoe sales person today and a "mortgage consultant" tomorrow.

I fought for years in Michigan to get a licensing bill passed to no avail. I now live in Arizona and the Arizona Legislature put the bill on the back shelf as well.

I was in a local Mercedes Benz dealer yesterday and the finance person made a comment that her show room is now full of ex-mortgage loan officers.

I believe that if the public knew that there was NO training or licensing required to be a mortgage officer that they would be very concerned.

There really needs to be a national standard to get into the business in my opinion.

In regard to the Reverse Mortgage Loans, you are right, they are VERY expensive right now. But that segment of the industry has been growing at triple digit rates for a number of years. Eventually more players will enter that market and the costs will come down.

It's no different that when flat screen televisions first came out. No one could afford them, now they are in the reach of millions.

Perhaps when some of these slime brokers that you mention start talking advantage of grandma and grandpa...someone in Washington will take a stand on this issue.

George Muzea

December 14, 2007 9:50 AM

Is it mortgage loan officers at banks that caused the problem or was it independent mortgage companies?

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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