Beware: Reverse Mortgages Can Be Dangerous for You and Your Members

Credit Union Times | Wednesday, April 30, 2008

Consumer interest in reverse mortgages is growing, which is good news for the lenders underwriting the loans and for the brokers originating them but not for the seniors targeted or for the credit unions getting aggressively recruited to help market the product.

What’s so bad about these mortgages? Here’s a hint: The folks promoting them are the same finance professionals who helped create the subprime mortgage mess, and they’re using the same business model: large commissions for originators, outsized fees for lenders, and high costs and outsized risks for borrowers. We’ve seen how this approach worked out for subprime loans, and there is no reason to expect a different outcome for reverse mortgages.

Reverse mortgages aren’t new. They were introduced more than 25 years ago as a vehicle that would allow house-rich-cash-poor seniors tap the equity in their homes to provide the funds needed to age in place. But that original concept, which viewed reverse loans as a last resort for a relatively small pool of seniors, bears little resemblance to the loans that are being marketed today as a lifestyle option, appropriate not just for some seniors but for all, and intended not to cover essentials, but to finance luxuries seniors can’t otherwise afford, or (even worse) to provide funding for investments that seniors shouldn’t be financing with home equity and probably shouldn’t be making at all.

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