Reverse Mortgages, Liability & Wall Street Reform

The House has now passed the Wall Street Reform bill accepted by a conference committee of the House and Senate, whether it will also pass in the Senate is likely but not certain. What is certain is that we now know what the 2,323-page conference bill says, and especially what it says about reverse mortgages.

In basic terms, the legislation holds out the idea that lenders might soon face big penalties if they abuse reverse mortgage borrowers, penalties that could total tens of thousands of dollars — if not more.

Negative Amortization

One of the key aspects of the bill concerns the mortgage mess and how to stop toxic loan practices. The bill defines “qualifying” mortgages, loans which represent little risk or liability to lenders. However, if lenders offer “unqualified” loans then they have to set aside 5 percent of the loan amount in a reserve fund, a requirement which will make unqualified loans rare.

Qualified loans look like the mortgages your parents had: fixed-rate, self-amortizing and with no balloon payments or negative amortization.

This is a solid definition, one from which reverse mortgages are excluded. The reason: A reverse mortgage is nothing but a huge negatively-amortizing loan which is repaid with a mammoth balloon payment. And that’s appropriate in the context of a reverse loan, a mortgage which unlike a forward loan requires no monthly payments for principal and interest.

Reverse Mortgage Study

But while the conference bill excludes reverse mortgages from the definition of a “qualified” loan, it also says that the government needs to take a closer look. The legislation calls for a reverse mortgage study, a review to determine whether any “conditions or limitations on reverse mortgage transactions are necessary or appropriate for accomplishing the purposes and objectives of this title, including protecting borrowers with respect to the obtaining of reverse mortgage loans for the purpose of funding investments, annuities, and other investment products and the suitability of a borrower in obtaining a reverse mortgage for such purpose.”

This is loaded language.

The insurance industry, as we reported earlier, was able to exclude annuities from federal regulation under the proposed bill. However, a lot of people on Capitol Hill vehemently oppose the sale of annuities to seniors, got them banned for sale by reverse-mortgage lenders in the 2008 FHA reform bill and now want to make sure they stay banned.

The part about “obtaining of reverse mortgage loans for the purpose of funding investments” is a done deal. That was in the 2008 legislation. What’s new is the part about “suitability.”

With a “suitability” standard lenders would have to show that a loan was appropriate for a borrower, something that would only come up if the borrower was foreclosed. If it turns out that the loan was not “suitable” then the lender can face big damages.

How much liability? We don’t have a completed reverse mortgage study so we don’t have a set answer, but we do know that in the case of “qualified” loans the standard for lender abuse set by the bill is this: three-years of interest payments and damages plus attorney’s fees.

This entry was posted on Wednesday, July 7th, 2010 at 12:06 am and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.