Borrower interest in reverse mortgages is increasing, and so are concerns about them. Citing a long list of those concerns in a recent report, consumer advocacy groups are urging the new Consumer Financial Protection Agency to increase oversight of the loans, which lenders have begun marketing more aggressively as demand for other loan products (including subprime mortgages) has waned.
“The public, policy makers and legislators should be aware that …yesterday’s subprime lenders are now preying on a growing elderly population who are trying to remain financially independent in their own homes during a depressed economy,” the report, issued jointly by Consumers Union, the California Advocates for Nursing Home Reform and the Council on Aging (Silicon Valley), warns.
According to government statistics, reverse mortgage originations have increased dramatically, from about 8,000 loans in 2001 to nearly 120,000 last year, reflecting the increasing pool of baby boomers eligible for federally insured Home Equity Conversion Mortgages – HECMs) and the erosion of retirement savings (resulting from stock market losses and the elimination of corporate pensions), which is leading more retirees to rely on home equity to supplement their income
The Consumers Union report highlights a number of concerns about reverse mortgages, among them:
- The complexity of the products and the vulnerability of borrowers to high-pressure sales tactics and misleading marketing campaigns.
- Heightened foreclosure risks resulting from the inability of financially strapped borrowers to make their property tax and insurance payments.
- The promotion of reverse mortgages as a lifestyle choice rather than a last resort that, consumer advocates say, borrowers should consider only if other, potentially more beneficial options aren’t viable.
Advocacy groups are also fighting a Federal Reserve proposal that would allow lenders to cross-sell financial products to reverse mortgage borrowers as long as they wait 10 days after the loan is originated. A 2008 law imposes tighter restrictions on such cross-selling activities, which the Consumers Union report cites as a major problem with reverse mortgages.
The Consumers Union report asks the CFPA to consider several reforms, including:
- Requiring lenders and brokers to assess the “suitability” of the loans for the borrowers to whom they offer them.
- Establishing a fiduciary standard requiring brokers and lenders to act affirmatively in the best interests of their reverse mortgage customers.
- Strengthening the prohibitions on cross-selling to reverse mortgage borrowers.
- Strengthening the “quality and content” of the financial counseling HECM borrowers are required to obtain.
Spokesmen for the National Reverse Mortgage Lenders Association (NRMLA) criticized the report, saying it failed to consider improvements in reverse mortgages (including stronger consumer protections regulators have already implemented), and failed to document the problems it alleged.
An association survey released about the same time as the Consumers Union report, found that 74 percent of seniors with reverse mortgages viewed their experience with the loans as “favorable,” 75 percent said they understood the terms “well” or “fairly well,” and 90 percent said they had felt no sales pressure when they obtained their loans.
“I think they’re rattling the cages here without having much concrete to offer or any evidence to back up their allegations that there are widespread problems,” Peter Bell, president of the NLRMA, said of the Consumers Union report. “[Our] research validates that seniors with reverse mortgages are pleased with their loans and with the experience of obtaining them,” Bell added in a press statement.
But he also told the Wall Street Journal that industry executives are willing to accept additional regulations designed to increase borrower confidence in the loans. Favorable demographics ensure that demand for reverse mortgages will continue to grow, Bell noted, “but only if consumers feel the products are fair and the people who offer them are trustworthy. If the regulatory regime helps get us there,” he told the Journal, “that’s great.”
MORTGAGE LITIGATION ESCALATING
Mortgage-related litigation increased by more than 40 percent in the third quarter, as investors joined, and outpaced, consumers in pursuing lenders and loan servicing companies for negligence, fraud, or both, in originating loans and initiating foreclosure actions. Patton Boggs, a law firm specializing in bank litigation, tracked more than 100 civil and criminal cases involving mortgage lending in the third quarter, compared with 75 in the second.
“In recent months, the focus of mortgage litigation has begun [to shift] from primarily consumer foreclosure disputes toward loan documentation and servicing issues,” Patrick McManemin, a partner in the firm’s Dallas office, said in a press statement. “Therefore, an increase in residential note repurchase litigation from investors in securitization trusts and banks that face indemnity claims from government-sponsored enterprises should be expected.”
In a related development, the attorneys general in Arizona and Nevada have filed suit against Bank of America, accusing the lender of “widespread fraud” in its handling of loan modification requests. Specifically, the suit claims, the bank:
- Encouraged consumers to seek modifications and then foreclosed on them anyway, despite assurances to the contrary;
- Advised borrowers, incorrectly, that they would not be eligible for modifications unless they defaulted on their loans first;
- Promised that modifications would be made permanent after a trial period, but then withdrew the promise;
- Manufactured pretexts for rejecting modifications that actually met the bank’s criteria for approval.
“Bank of America’s callous disregard for providing timely, correct information to people in their time of need is truly egregious,” Catherine Cortez Masto, the Nevada Attorney General, said in a press statement.
The law suit represents a window-rattling salvo in a battle banks are fighting on multiple fronts as consumers, investors, industry regulators and lawmakers (state and federal) target flawed foreclosure procedures.
Separately, industry analysts have reported that courts in several states have dismissed foreclosure actions in which documents were not actually signed by the attorneys whose signatures appear on them, threatening sanctions against the attorneys involved.
If widespread, the practice could overturn thousands of foreclosure judgments, in addition to those already in question because of alleged “robo-signing” practices, in which attorneys signed documents without actually reviewing them.
“What you have here is a non-lawyer engaged in unauthorized practice of law,” Max Gardner, a consumer bankruptcy attorney who specializes in foreclosures, told ProPublica. “And that would be a serious problem in terms of that foreclosure judgment [withstanding a challenge.] I think this is the next huge issue,” he predicted.
Also in the running for “next huge issue” is the future of MERS, the nationwide mortgage registration system that has emerged in the cross-hairs of many foreclosure challenges and may become collateral damage in the legislative reaction to them.
Three Congressional representatives have filed legislation that would prohibit Fannie Mae and Freddie Mac from purchasing or acquiring loans originated through MERS. Representatives Marcy Kaptur (D-OH), Raul Grijalva (D-AZ), and Carolyn Kilpatrick (D-MI) are sponsoring the measure, which would take effect 6 months after its enactment.
Critics say the registration system illegally bypasses the traditional system of recording mortgages in the counties in which the properties are located, obscures the ownership of the loans and disrupts the chain of title needed to document ownership of the property.
MERS officials said in a press statement that they are analyzing the legislation and its likely impact. “MERS brings considerable value and clarity to homeowners, regulators and the mortgage industry, and we hope to emphasize those contributions in our conversations with Rep. Kaptur, her staff, and other involved with this legislation,” the statement said.
BAD SCORES
The Department of Housing and Urban Development (HUD) is investigating allegations that 22 lenders discriminated illegally against borrowers obtaining FHA (Federal Housing Administration)-insured loans by requiring higher credit scores than the FHA itself mandates.
The National Community Reinvestment Coalition (NCRC) initiated the complaint after an investigation that found many of the leading FHA lenders failed to offer FHA loans to potentially qualified borrower with credit scores of 620, even though the FHA will accept scores of 580 or lower, depending on the size of the borrower’s down payment.
Of the lenders targeted by NCRC “mystery shoppers,” 32 (65 percent) required credit scores of at least 620 for FHA loans and 22 percent set their minimum scores at 640. Under the FHA’s underwriting standards, borrowers making the minimum down payment (3.5 percent) must have credit scores of 580 or higher; borrowers with lower scores (between 500 and 580 are still eligible for FHA loans but must put a minimum of 10 percent down.
The NCRC contends that the higher credit score requirements have a disproportionately negative impact on Black and Latino borrowers and have no business justification, because the FHA ill insure loans to borrowers with lower scores.
“Critical to our nation’s economic progress is the ability of homeowners to get quality refinancing, and for homebuyers to reclaim vacant houses by accessing quality mortgage credit,” John Taylor, president and chief executive of the NCRC, said in a press statement. “The housing crisis is not the fault of working-class families,” he added, “but they are the ones suffering the consequences of Wall Street’s malfeasance.”
The Community Mortgage Banking Project (CMBP), representing mortgage bankers, replied that the higher credit scores reflect industry efforts to tighten the loose credit standards that contributed to the financial melt-down and underscore “the compelling need for lenders to apply judgment and discretion” in establishing underwriting standards.
“FHA has always recognized the need for lenders and investors in FHA loans to establish and maintain their own risk-management tolerances,” Glen Corso, managing director of the industry trade group, said in a statement. “By setting common sense credit standards, FHA lenders are exercising prudent judgment and protecting borrowers, neighborhoods, the FHA and U.S. taxpayers from another round of excessively high defaults and foreclosures.”
Industry critics have excoriated lenders for the lax credit standards that contributed to the financial melt-down, Corso noted. “To ask mortgage lenders [now] to ignore risk factors for certain loans is reckless and misguided.”
HAMP STILL FALLING SHORT
The Congressional Oversight Panel (COP) charged with monitoring the Home Affordable Mortgage Program (HAMP), have found that the Obama administration’s primary foreclosure prevention efforts to be flawed and ineffectual. This will come as no surprise to anyone who has followed the running tally 500,000 foreclosures prevented to date and 700,000 projected vs. 8 million to 13 million foreclosures predicted by 2012) or read prior COP reviews, which were equally critical of the program.
The most recent report concludes that the Administration has tried to improve HAMP, but those “minor tweaks” have not targeted the panel’s primary concerns:
- The failure to collect and analyze data that would measure HAMP’s results and identify its problems.
- The failure to set meaningful benchmarks for evaluating the program.
- The failure to hold loan servicers responsible for refusing to approve modifications or for processing them improperly.
- The failure to require servicers to modify loans rather than providing incentives for them to do so.
Failure to address the obstacle created by second lien holders, who refused to write off their interests.
The report says there is no way the program will achieve its goals or even spend most of the $30 billion in Troubled Asset Relief Program (TARP) funds allocated for it. “Had Treasury acknowledged this reality before its crisis authority expired, it could have reallocated the money to a more effective program,” the report says. “Now, that option is gone. Absent a dramatic and unexpected increase in HAMP enrollment, many billions of dollars set aside for foreclosure mitigation may well be left unused….[and] an untold number of borrowers may go without help -- all because Treasury failed to acknowledge HAMP’s shortcomings in time.”
Treasury officials say the criticism is “somewhat unfair” and unduly harsh, failing to acknowledge the difficulty of the foreclosure prevention task or what HAMP has achieved despite those obstacles. “This program has had many critics, and there have obviously been many criticisms of it, but I think it’s important to recognize what it has accomplished,” Tim Massad, Treasury’s acting assistant secretary for financial stability, told reporters on a conference call. The program hasn’t helped as many borrowers as hoped, but it has assisted more than 500,000 of them, “and that’s a lot of people,” Massad said. “We shouldn’t discount that.”
HOME OWNERSHIP APPEAL DIMS
The economic downturn, the dizzying and continuing decline in home sales and prices, and predictions that housing markets may struggle for years, all have taken a toll on how existing homeowners and prospective home buyers view home ownership.
Owners who are delinquent on their mortgages, not surprisingly, are particularly down on ownership. Half of them in a recent poll said they would rather rent than buy their next home. Among all respondents, 50 percent said they would rather rent, up 10 percent from January, while 45 percent said they would rather buy, down 45 percent since the beginning of the year. This is the first time the rental preference has exceeded the ownership preference in this survey of housing attitudes conducted quarterly by Fannie Mae.
Although 68 percent of the respondents said they still think now is a good time to buy, that is 2 percent fewer than in the June survey; 29 percent said they think this is a bad time to buy, up 2 percent since June; 85 percent agree that this is a bad time to sell a home, also up 2 percent from June.
Americans still overwhelmingly want to own their own homes – eventually. More than half of current owners and renters said the housing crisis hasn’t affected that long-term goal. But their near-term views are different. One-third of all respondents said they would be more likely to rent their next home than buy, up from 30 percent in January; 59 percent of current renters said they would continue to rent when they move, up from 54 percent a few months ago.
Delayed marriages, shrinking households, and financial fears are muting the near-term enthusiasm for home ownership, Doug Duncan, Fannie Mae’s chief economist, said. “Despite Americans’ strong desire to own their homes, our study reveals that life events are greatly influencing families’ decisions to rent. This trend, coupled with the housing crisis, has caused consumers to approach homeownership with greater caution and thoughtfulness,” he added.
