A decade after the last financial crisis, money is already flowing into some highly questionable loans. Much of this is simply risky borrowing by highly leveraged companies or homebuyers. But some of it raises questions of propriety.
One case in point is the flourishing business of reverse mortgages, which picked up during the Great Recession. Known for their slick pitchmen touting instant money during daytime TV, these loans have long been known for their high costs and hidden fees. Adding to the debate, a USA TODAY Network investigation published this week found that the industry has become a platform for predatory lending.
The investigation found that nearly 100,000 reverse mortgages had defaulted in recent years, with low-income urban neighborhoods hardest hit. Often, the loans were placed thanks to aggressive door-to-door pitches.
Lenders and loan brokers concentrate on these communities because they know that the homeowners’ lack of sophistication, combined with their sometimes difficult financial situations, make them easy targets.
There’s nothing inherently wrong with reverse mortgages, which allow seniors to stay in their homes while borrowing against a percentage of the equity. The loan can be taken as lump sums, regular payments, lines of credit or some hybrid of these.
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The homeowners generally don’t make loan payments. At death, their estate either sells the property and pays off the loan (which has grown with compounded interest) or simply deeds the property to the lender.
Loans that don’t have to be paid back during one’s lifetime should not result in a default. But they do, often because the homeowner doesn’t make tax or insurance payments, or falls behind on the paperwork.
What’s more, if the value of a property drops below the value of the loan, the lenders have taxpayer-based Federal Housing Administration insurance to make up the difference.
With incentives like this, is there any wonder why mortgage brokers would run around the country making their hard sell to unsuspecting and financially squeezed people?
To reduce the number of seniors losing their homes, greater oversight is needed. Reps. Maxine Waters, D-Calif., and Denny Heck, D-Wash., for instance, have a proposal that would require a lot more to happen between default and foreclosure.
Beyond that, some more fundamental questions need to be asked, starting with whether the federal government should be in the business of enabling reverse mortgages.
While the concept of allowing seniors to unlock the wealth they have in their homes is sound, the reality is that reverse mortgages add complexity and risk at a time in people’s lives when they should be reducing both.
When so many such loans are going into default, it’s a clear sign that something is amiss.
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