Loan Modification

Are HECM reverse mortgages the equivalent of subprime loans?

By Gina Pogol

Bank of America recently made the news when it announced that it would be discontinuing its profitable reverse mortgage product. The change is intended to free up resources so the bank can focus on making traditional mortgages and processing mortgage modification applications. Others, however, speculate that the move is a preemptive strike meant to head off potential criticism that could come from selling a controversial product.

Peter Skillern, executive director of the Community Reinvestment Association of North Carolina, compared reverse mortgages to subprime loans. Home Equity Conversion Mortgages (HECMs) are unlike subprime mortgages for several reasons.

First, with subprime mortgages, people whose credit has been damaged in a poor economy pay a much higher interest rate, while with reverse mortgages, borrowers’ credit rating has no effect on their rate. Interest rates are similar to those charged for normal prime mortgages — unlike subprime products which impose rates several percentage points higher than prime loans.

Others are also climbing on the bandwagon.

The Charlotte Observer claims that reverse mortgages are “often misunderstood” because borrowers don’t realize that the money has to be paid back. And there are fees involved, and homeowners could “almost always get more money by selling the house instead.”

Really?! How many folks take out a loan and don’t understand that it has to be paid back? That’s why it’s called a loan. It does a disservice to seniors to treat them as though they are five years old and unable to understand something that basic. Or that there are fees (and thanks to HECM Saver those fees are much lower than before), which primarily consist of upfront mortgage insurance premiums required to protect taxpayers who ultimately back these loans? Those are very clearly disclosed and HECMs also require reverse mortgage counseling from HUD-approved counselors. How many products come with that level of guidance? Not insurance, not cars, or houses, or medical procedures… you get the idea.

And as for selling the home generating more proceeds than borrowing against it, that’s a non-starter. A big reason for taking a Home Equity Conversion Mortgage in the first place is the ability to remain in your home  while still getting cash. Not all seniors want to spend their golden years in cheaper, less desirable quarters.

No one product, home loan or otherwise, is appropriate for everyone. But demonizing something and limiting access to a loan that is uniquely useful to folks who often have no other alternative for increasing their comfort and security in the latter stages of their lives is irresponsible and perhaps even cruel.

Full post as published by FHA Mortgage Guide on February 09, 2011 (boomark / email).