Senator Clark, Representative Davnie, And Attorney General Lori Swanson Announce Reverse Mortgage Legislation

Attorney General also warns seniors to be sure to fully understand complex mortgage product

February 09, 2009 – (RealEstateRama) — Assistant Senate Majority Leader Tarryl Clark (St. Cloud) and Representative Jim Davnie (Minneapolis), Chair of the House Labor and Consumer Protection Division, and Attorney General Lori Swanson today announced a bill to be introduced today to establish common-sense protections for senior citizens from the potential risks of reverse mortgages. A reverse mortgage is a type of loan made to senior citizens, generally age 62 or older, which allows seniors to convert their home equity into cash.

Swanson and the legislators noted that reverse mortgages are now pitched to seniors in celebrity-laden TV ads, direct mailings, and through “upselling” by lenders. They noted that some brokers and lenders are looking for new profit centers in the wake of the mortgage meltdown and that reverse mortgages are an attractive market niche due to demographics. An estimated $4.3 trillion in home equity was held by Americans age 62 and older in 2008, according to Ginnie Mae.

“A senior citizen’s home is often their primary nestegg. Some brokers and lenders who contributed to the mortgage meltdown are now sliding over into the reverse mortgage business, and we need to make sure that history does not repeat itself with imprudent reverse mortgage loans made to seniors,” said Swanson.

Swanson said that reverse mortgages are suitable for some senior citizens but are not for others. She warned: “Taking out a reverse mortgage is a major and serious decision. Seniors should go slow to make sure they fully understand the product and whether it is in their best interest.”

A reverse mortgage loan is secured by the equity in the senior’s home. The product is called a “reverse” mortgage because the payment stream is “reversed” from a traditional mortgage. With a reverse mortgage, the lender pays the senior citizen a lump-sum or periodic payments. The senior citizen makes no interest or principal payments during the life of the loan, but instead must pay it back only when he or she moves or dies. At that point, the principal and interest is repaid to the lender through the proceeds from the sale of the home.

Several characteristics make reverse mortgages susceptible to possible abuse: (1) they are targeted exclusively to senior citizens; (2) they provide the senior citizen with a substantial amount of cash; and (3) they are more complex than a regular mortgage. In 2008, FBI Director Robert Mueller, in testimony to the United States Congress, described an uptick in reverse mortgage complaints. Three problem areas cited by consumer advocates are: (1) loans marketed to senior citizens that bear high fees and costs when more suitable alternatives are available; (2) marketing reverse mortgages as a means of “easy credit” to finance an extravagant lifestyle, while depleting home equity that may be needed for living expenses; and (3) encouraging the senior to take out a reverse mortgage in order to “cross sell” other financial products.

“With trillions of dollars in home equity held by American senior citizens and an emerging reverse mortgage niche market, Minnesota should put protections in place now to prevent future problems, like those we saw the driving subprime mortgage meltdown,” said Senator Clark.

“In 2007, the Minnesota Legislature passed legislation banning predatory mortgage lending practices that led, in part, to the foreclosure crisis, and a damaged economy. We have an opportunity now to take proactive steps to ensure that we do not repeat a similar crisis with reverse mortgages and senior citizens,” said Representative Davnie.

The bill announced today would put in place a number of common-sense protections:

• Provide a 30 day rescission period in which a senior may cancel a reverse mortgage.
• Require lenders to have reasonable grounds for believing that the reverse mortgage is suitable for the borrower.
• Limit insurance producers from cross-selling insurance products to seniors using the proceeds of a reverse mortgage. (The bill would strengthen and expand federal law in this area.)
• Align Minnesota law with federal reverse mortgage lending requirements and beef up the counseling to include reverse mortgages beyond just those that are federally-insured and federally regulated. The bill also expands upon current Minnesota standards by requiring lenders to positively promote the benefits of reverse mortgage counseling to potential borrowers. Consumer advocates currently cite cases where lenders disparage and thereby dilute the value of federally-mandated counseling.

The Attorney General’s Office has prepared a brochure entitled, “The Real Deal on Reverse Mortgages,” which is available online at www.ag.state.mn.us. Among other things, the Attorney General warned seniors to:

• Consider whether other more affordable options are available.
• Understand that if the senior’s home equity is depleted, there may not be money available to pay for health care or living expenses later.
• Exercise great caution anytime are encouraged to pay for another product (i.e. a new roof, insurance, an investment, etc.) by taking out a reverse mortgage.
• Get legitimate counseling through a reputable nonprofit agency.

According to the federal Department of Housing and Urban Development (“HUD”), reverse mortgages are a $25 billion industry. Ginnie Mae Vice President Tom Weakland states:

“The outlook for this market will only improve, given the demographics of our population. Baby boomers are moving toward retirement at the rate of 10,000 per day. Currently, 34 million Americans are 65 or older. By 2030, there will be 71 million senior citizens, comprising 21 percent of the population. If the increasing age of Americans is not enough to spur your interest in reverse mortgage products, consider this: 81 percent of seniors own their homes, controlling more than $4 trillion in home equity, an amount that could grow to $37 trillion by 2030.”

The most common type of reverse mortgage is a federally insured product known as a Home Equity Conversion Mortgage, but lenders have also begun offering private reverse mortgages to people younger than age 62.

Individuals who have questions or wish to file a consumer complaint may contact the Minnesota Attorney General’s Office by calling 1-800-657-3787 or 651-296-3353. Consumers may also download a Complaint Form from the Attorney General’s website at www.ag.state.mn.us and mail the completed form to the Attorney General’s Office at: 1400 Bremer Tower, 445 Minnesota Street, St. Paul, MN 55101-2131