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Reverse mortgages shouldn’t be lumped into ‘bad’ category

Tom Kelly

Comparing every loan’s shortcoming – real or perceived – to a “subprime” product needs to stop.

For example, John Dugan, the comptroller of the currency, made an astonishing remark in a prepared statement recently in Orlando: “Consumer compliance risks with reverse mortgages are real, and indeed, I am struck by some of the similarities to the risks of subprime mortgages.”

Federal Housing Administration Commissioner Brian Montgomery is the assistant secretary of housing for the U.S. Department of Housing and Urban Development. He is a thoughtful, candid Republican from Texas who oversaw the nation’s most popular reverse mortgage program for the past several years. He predicts a bright future for reverse mortgages, despite the credit crunch, and he even tried to persuade his mother to take out a reverse.

Montgomery was stunned by Dugan’s comments and immediately stated his opinion in writing to one of the nation’s top banking officials:

“Your comments may have created unnecessary mistrust and confusion about a product that has a very successful track record of giving thousands of seniors the opportunity to use the equity in their homes to maintain an independent lifestyle. I worry that your comments could dissuade many who could truly benefit from a reverse mortgage from using the program and benefiting from the financial independence it provides.”

FHA is now shouldering a greater portion of the residential loan load and its insurance component has come under greater scrutiny because of it. The growing number of reverse mortgages has brought more incidents of fraud, which have unfairly grabbed the headlines from the thousands of satisfied seniors who took out a reverse.

Let’s face it. Flipping, equity skimming, unauthorized recipients, and poor annuity choices plague all loans. To avoid cases of property flipping and other fraud, lenders now must take steps to ensure that (a) only current owners of record may sell properties that will be financed using FHA-insured mortgages; b) any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and c) FHA will require additional documentation validating the property’s value for resale that occurs between 91 and 180 days where the new sales price exceeds 100 percent of the previous sales price.

Seniors are clearly the most susceptible group when it comes to financial decisions. But there are too many individuals in high places who do not understand reverse mortgages and refuse to expose their benefits, yet they trot out every single blue-haired lady who was stiffed of her hard-earned equity. No happy success stories here?

Look at the popularity of the reverse mortgage program. The way it has been portrayed – and communicated – all applicants stand to get swindled. Not so.

Tom Kelly is a former real estate editor for the Seattle Times. His book “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore of Stewart International.
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