Dugan: Reverse Mortgages May Worsen Repo Properties Crisis
Reverse mortgages may pose the same compliance risks as subprime loans, according to Comptroller of the Currency (OCC) John Dugan. He also criticized his agency for responding too slow to the growing repo properties problem which led to the collapse of the housing market.
Dugan warned that reverse mortgages have the same characteristics as risky types of subprime loans, adding that the experience with subprime lending, which resulted to the repo properties crisis, should be enough to show the association between safety, soundness and compliance.
He encouraged regulatory agencies to make sure that interagency guidelines being developed are sufficiently robust that they could provide ample protection to homeowners. He said that his office would monitor national banks to make sure that they comply with the guidelines and existing relevant regulations.
However, he pointed out that guidelines alone will not be enough to protect consumers from reverse mortgages and the effects of the growing number of repo properties. He believed that definitive regulatory standards should be adopted to ensure consumer protection against risks posed by reverse mortgages.
Dugan said that OCC is prepared to adopt regulatory standards even if the rules that his office advocates cover only reverse mortgage loans by national banks.
Reverse mortgages are loans that offer line of credit or source of income to older homeowners by permitting them to use the equity on their properties without moving out or selling the houses.
Nontraditional underwriting process is adopted on reverse mortgages because homeowners are not required to make any repayment until they die, fail to pay their property taxes, maintain the property or moved out of the house permanently.
In the event that the property is sold in order to pay the loan, borrowers are not responsible for the amount in excess of the market value of the property. Whatever equity is left on top of the loan amount due legally belongs to borrowers or their heirs.
The Federal Housing Administration of the Department of Housing and Urban Development insures about 90 percent of the total reverse mortgages in the country, which is popularly known as home equity conversion mortgages (HECMS).
Dugan predicts that several factors such as the growing number of repo properties, job losses, declining retirement account values and low pension benefits will drive the demand for reverse mortgage loans as older homeowners will use their home equity to increase their income.
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