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REVERSE MORTGAGES - The US authorities have linked the sale of these Equity Release schemes to the sale of subprime loans. Iff wrote a report for the European Commission where it outlined where such loans exist in the EU, what the risks are for consumers, and how these schemes aimed at supplementing one's retirement funding should be distinguished from other asset based forms of borrowing.
FEDS PULL REVERSE MORTGAGE ALARM
BLOOMBERG NEWS
Posted: 06/08/2009 02:52:47 PM PDT

Comptroller of the Currency John Dugan said a type of mortgage sold to older homeowners may pose the same risk as subprime loans, and that his agency was slow to act as rising foreclosures led the market to collapse.

"We all could have sounded the alarm earlier about risks that were developing in the subprime mortgage market," Dugan said at an industry conference in Orlando he raised concerns about so-called reverse mortgages. "It is imperative that our consumer protection standards be robust."

Congress stepped up efforts to curb predatory lending practices and halt foreclosures after the subprime mortgage market collapse in 2007. Lawmakers passed a $700 billion package that was signed into law in October and sought to shore up the financial system and halt the record pace of foreclosures.

"While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages - and that should set off alarm bells," Dugan said at the American Bankers Association conference on compliance issues. "Now is the time to get out in front of this issue — before real problems develop."

A combination of job losses, lower pension benefits and declining values in retirement accounts will increase demand for reverse mortgages as homeowners older than 62 seek to increase their income by using the equity in their homes, he said. The loans are often attractive to lenders because
insurance from the Federal Housing Administration limits their losses, he said.

Dugan said OCC will release guidelines on reverse mortgages, which let a homeowner borrow without having to make payments until they die, sell the home or fail to pay taxes. Regulators should establish more rules for borrowers and lenders, including requiring escrows for taxes on reverse mortgages, he said.
Risks that contributed to the collapse of the subprime-mortgage market also are a concern in the sale of reverse mortgages, Dugan said. Complex lending products have the potential to result in "skewed incentives" for servicers that are underwriting reverse mortgages, and the product is "fraught with consumer compliance concerns," he said.

Dugan, who regulates more than 1,500 banks including units at Citigroup Inc. and Bank of America Corp., said the agency needs to be on "constant alert to emerging risks" and remain vigilant on regulatory compliance. He said lenders contributed to the worsening economy by using loose underwriting standards and failing to adequately protect consumers.

The Department of Housing and Urban Development has estimated borrowers with lines of credit often withdraw at least 60 percent of their funds once the loan is approved, Dugan said. HUD pledged to develop programs that give financial counseling to consumers, including those with reverse loans, he said.

ID: 43055
Author(s): iff
Publication date: 09/06/09
   
URL(s):

www.mercurynews.com

Link to iff report on Equity Release Schemes on the European Commission's website (under Studies)
 

Created: 10/06/09. Last changed: 10/06/09.
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