Avoiding Past Subprime Woes When Going in Reverse

By Suzanne Boas

Ms. Boas, president of the Consumer Credit Counseling Service of Greater Atlanta, has written an opinion piece on how she believes reverse mortgage originators can stop the kind of problems seen in subprime credit mortgage lending from recurring in the reverse mortgage market.

We all know this is a challenging time for the mortgage industry. Loss mitigation teams around the country are feverishly working overtime to help borrowers affected by the subprime mortgage crisis. At the same time, executives are looking to the future. They need to sell products that meet revenue and earnings goals and move their companies forward if they want to have long-term success.

There is no doubt that reverse mortgages will be one of the industry's growth products for the next several years. As the country's population ages, many of the nation's 80 million baby boomers will consider tapping into the equity in their homes to help pay for retirement. There are some people predicting that one in five mortgage loans by 2015 will be a reverse mortgage.

The signs of this coming boom are already evident.

As the mortgage industry works through the current subprime crisis, now is a good time to reflect on the lessons we've learned and how those lessons can be applied to people who will be taking out a reverse mortgage in the future.

"After all, there are similarities. The seniors seeking reverse mortgages are usually financially vulnerable -- much like the millions of people who took on subprime mortgages.

And, like subprime borrowers, people seeking a reverse mortgage are not wealthy. During 2007 our average reverse mortgage client was 73 years old and had income of $24,598. More important, their monthly expenses exceed their monthly income by $357.

We know that many people who bought homes in the past two years did not understand the terms of their loans. With reverse mortgages, there is already one big difference. Most reverse mortgage lenders are requiring homeowners to receive credit counseling before signing a contract.

I see this as an enormous benefit to consumers and a huge advantage for the mortgage industry. Counseling assures that borrowers receive unbiased information to help them compare the features of various reverse mortgage products.

At the same time, making counseling a requirement is important for mortgage companies. It will help them rebuild their reputations and attract customers to a product that will be needed by many.

Counseling is already having an impact. Approximately 10% of homeowners that speak with our counselors decide shortly after their session not to pursue a reverse mortgage. Industry sources say up to 30% of homeowners eventually decide not to sign up for a reverse mortgage loan following counseling.

As an unbiased third party, the role of the counseling agency is simple: to educate homeowners about the benefits and costs of a reverse mortgage loan.

In short, it's critical for homeowners to be able to manage their new infusion of funds in the most effective way possible.

While most people have immediate financial needs, there are two questions that almost everyone asks: Will getting a reverse mortgage mean I will lose my home? What is the impact of a reverse mortgage on leaving my house to my heirs? (As long as they live in their home, pay the property taxes and insurance, and keep it in good condition, they will not lose their home. Their heirs can inherit the home, but they must pay the reverse mortgage loan off within a certain amount of time after the owner dies.)

Before the subprime mortgage crisis becomes history, I urge the industry to make certain that counseling from a reputable source continues as part of the reverse mortgage process. It will help all of us avoid a future financial quagmire and help the industry rebuild the trust and reputation that is so necessary for consumers to conduct business with confidence.