Subprime Revisited - clevelandmedia.cleveland.com/consumeraffairs/other/Reverse... · 2016. 11. 7. · The Annuity Trap 14 VIII. Private Equity Conversion Products 14 Proprietary

How Reverse Mortgage Lenders Put Older Homeowners’ Equity at Risk

October 2009

National Consumer Law Center7 Winthrop Square, 4th Floor

Boston, MA 02110 (617) 542-8010

www.consumerlaw.org

SUBPRIME REVISITED

NATIONAL CONSUMER LAW

CENTER®

The authors would like to thank Odette Williamson for overseeing the writingand editing and coordinating the release of this report; Carolyn Carter and WillardOgburn for their valuable guidance and input to early drafts; Julie Gallagher fordesigning and formatting the report and its graphics; Denise Lisio for editorialassistance; and Eric Fletcher for assistance with footnoting. This report wasenriched by the support, insight and expertise of attorneys Daniel Claggett,Prescott Cole, Frank Kautz, Dan Murphy, Mark Redmond, David Mandel, DanielMulligan, Megan Tighe and Bill Brennan as well as advocates Len Raymond,Bronwyn Belling, Ken Scholen and Roberta Levitan. Among the many seniors andfamily members who shared their experiences with the authors were MargaretKeast, Janet Altenbaugh, Brenda Holder, Miguel Posada, Marvin Kidwiler andEugene Burson. Others provided information and opinions about the reversemortgage market, including Neil Granger, George Lopez, Jeffrey Nash, W.L.Pulsipher and Jeffrey Taylor.

ACKNOWLEDGMENTS

Subprime Revisited: How Reverse Mortgage Lenders Put Older Homeowners’ Equity at Risk

Written byTara TwomeyOf CounselNational Consumer Law Center

Rick Jurgens Contributing Author

I. Introduction 1

II. Reverse Mortgage Basics 2

HECM Loans 3

III. Origins and Evolution of Reverse Mortgages 4

IV. “The Senior Market is a Goldmine” 5

V. A Multi-Billion Dollar Opportunity 6

The Lenders 6

The Brokers 8

Wall Street and the Securitization Spigot 9

VI. The Marketing Machine 11

Pushing Reverse Mortgages 11

VII. More Payouts 12

Yield Spread Premiums 12

The Annuity Trap 14

VIII. Private Equity Conversion Products 14

Proprietary Reverse Mortgages 15

Equity Sharing Deals 15

IX.Disclosure and Counseling: The Bulwark Against Abuse? 16

Total Annual Loan Cost 16

HECM Counseling Requirement 17

X. Recommendations: Making the Reverse Mortgage Market Safe 18

CONCLUSION 20

Notes 21

TABLE OF CONTENTS

I. Introduction

The U.S. Office of the Comptroller of the Cur-rency and other federal regulators that overseebanks were slow to recognize the threat posed bythe recent boom in subprime mortgage lending,and slow to act. So it was noteworthy when, inJune 2009, Comptroller John C. Dugan, went be-fore a gathering of bankers and warned of a dangergrowing in a market designed to serve the na-tion’s seniors: “While reverse mortgages can pro-vide real benefit, they also have some of the samecharacteristics as the riskiest types of subprimemortgages—and that should set off alarm bells.”1

During 2008 more than 100,000 seniors usedreverse mortgages to tap more than $17 billion inhome equity.2 Within the mortgage industry, re-verse mortgages continue to grow despite theeconomic downturn, with volume more thandoubling between 2005 and 2008.3 Despite asummer slowdown in originations, 2009 still ap-pears to be on pace for a record year.

Certainly, the continuing availability of reversemortgages is good news for seniors who need tocash out some of their housing wealth to supple-ment Social Security, to meet unexpected med-ical costs, or to make needed home repairs. Butgrowth in the reverse mortgage market has un-leashed other, more malign forces.

Many of the same players that fueled the sub-prime mortgage boom—ultimately with disas-trous consequences—have turned their attentionto the reverse market. Lenders, including some ofthe nation’s largest banks, view that market as asource of profits that have dried up elsewhere.Mortgage brokers see it as a new source of rich

fees. Predators who once reaped profits from ex-otic loans have now focused on wresting morewealth from vulnerable seniors. And securitiza-tion, which allowed subprime loan originators todisassociate themselves from the downside risksof abusive lending, is becoming commonplace inthe reverse mortgage industry.

Reverse mortgages are complicated. The op-portunities for abuse abound. Seniors, many ofwhom lack experience with complex financialproducts, often depend upon lenders and bro-kers for expertise and guidance. Reverse mort-gage lenders, like subprime lenders, emphasizethe benefits that they provide to borrowers andoften tout their commitment to responsiblelending principles. However, such claims are un-dermined by a growing public record of how sub-prime lenders—including some now active in thereverse mortgage market—profited from actingirresponsibly during the recent mortgage boom.

In addition, reverse mortgage lenders have fol-lowed in the footsteps of their subprime counter-parts by using financial incentives to rewardbrokers for arranging deals that boost lenders’profits and raise the costs paid by borrowers. Byadjusting reverse mortgage loan terms, such asinterest rates, servicing fees, rate adjustment in-tervals and distributions, brokers and lenders canmaximize their profits at the expense of seniorhomeowners.

Seniors are also vulnerable to other abuses as-sociated with reverse mortgages. Some seniorshave been persuaded to sink proceeds from reversemortgages into complicated annuity contracts orexpensive long-term care insurance products.These products generate large commissions for

1

SUBPRIME REVISITED

How Reverse Mortgage Lenders Put Older Homeowners’ Equity at Risk

October 2009

sellers, but frequently prove financially toxic forsenior homeowners.

While counseling is required for all borrowersof federally insured reverse mortgages, only a hand-ful of states require counseling for all types of re-verse mortgages. And while quality counselingcan be helpful to seniors, counseling remains in-consistent and underfunded.

There is now an urgent need for more safe-guards at the federal and state level to protectconsumers from reverse mortgage abuse, to helpseniors preserve their home equity, and to ensurethat reasonably priced and fairly structured re-verse mortgages are available for those who trulyneed them. To strengthen protections, states andthe federal government should:

� Create suitability standards for reverse mort-gages and other equity conversion products re-quiring lenders and brokers to only arrangedeals that do not harm the financial well-beingof seniors;

� Strengthen borrower counseling, which todate remains inconsistent and underfunded;

� Ban yield spread premiums, which incent bro-kers to make loans more profitable for lendersand investors at the expense of borrowers;

� Regulate proprietary reverse mortgages andother equity conversion products, which arenot federally insured and not subject to exist-ing federal reverse mortgage regulations; and

� Improve data collection on reverse mortgagesand other equity conversion products that arenot currently reportable under the HomeMortgage Disclosure Act.

II. Reverse Mortgage Basics

Reverse mortgages enable senior homeowners toconvert equity in their homes into cash withouthaving to move out. Under a traditional “for-ward” mortgage, the lender advances the princi-pal at the origination of the loan, and the

borrower pays off the balance of the loan withmonthly payments. Under a reverse mortgage,the lender advances funds to a borrower as alump sum, in monthly payments, through a lineof credit, or a combination of these options. Theborrower does not make monthly payments onthis loan. Instead, over time, the reverse mort-gage balance rises as a result of additional ad-vances, accruing interest, and fees. Seniorsgenerally use reverse mortgages to tap home eq-uity while remaining in their homes, but someprograms allow borrowers to purchase homeswith a reverse mortgage.

Reverse mortgage borrowers must be at least62 years of age and must generally own their ownhomes free and clear or with a minimal amountof outstanding liens. Because reverse mortgagesare essentially equity-based transactions, thereare no income or credit qualifications.

The entire balance for a reverse mortgage loanis due at maturity. When the loan matures de-pends on whether the loan is a “tenure loan” or a“term loan.” For tenure loans maturity occurswhen the borrower dies, sells, or fails to continue tooccupy the home for at least a year. Term reversemortgages mature after a fixed term of years.

There are two principal types of reverse mort-gages: Home Equity Conversion Mortgages(HECMs) and proprietary reverse mortgages.HECM loans, which are discussed below, are fed-erally insured and make up the vast majority ofthe reverse mortgage market. HUD promulgatesregulations with respect to HECM loans, some ofwhich are intended to curb abusive lending. Pro-prietary reverse mortgages, which are discussedin section VIII, are equity conversion productsthat are developed and backed solely by private fi-nancial institutions. Proprietary reverse mort-gages lack even the basic federal consumerprotections that apply to HECM loans.

HECM LoansThe Home Equity Conversion Mortgage (HECM)program was designed to meet the needs of sen-ior homeowners by reducing economic hardship

2 SUBPRIME REVISITED

that results from increasing costs of health,housing, and subsistence needs at a time of re-duced income.4 The program is one of many single-family mortgage insurance programs admin-istered by the Department of Housing and UrbanDevelopment.5 As with all HUD-insurance pro-grams, borrowers pay premiums for the insur-ance and HUD guarantees that the lender will berepaid, up to specified limits, for extending creditto the homeowner.6 Under the HECM program,the senior homeowner is also protected by HUDin the event the lender is unable to fulfill its pay-ment obligation.7 The HECM loan is only avail-able through HUD-approved lenders.

Under the HECM program borrowers have achoice of receiving mortgage payments throughfive basic payment plans: tenure, term, line-of-credit, modified tenure, and modified term.8 Theamount that can be borrowed is based on themaximum claim amount, the age of the youngestborrower, and expected average mortgage interestrates. The maximum claim amount is the lesserof the appraised value of the home or the maxi-mum amount that HUD will insure. The Hous-ing and Economic Recovery Act of 2008 set themaximum claim amount for HECM loans at$417,000.9 The limit has been temporarily in-creased for 2009 to $625,500.10

Because interest is generally the largest singlecost of any reverse mortgage, the expected interestrate is an important factor in calculating the fundsavailable to senior homeowners. While some fixed-rate HECM loans have been available, most comewith adjustable rates, as allowed by statute.11

HECMs were designed to be “non-recourse”loans, which means that the borrower (or his orher estate) is never supposed to owe more thanthe loan balance or the value of the property,whichever is less.12 HECM loans may be prepaid,in whole or in part, without penalty.13 Borrowersare generally required to keep the property ingood repair and pay property taxes and hazardinsurance premiums in a timely manner.14

HECM loans have a number of costs and feesthat are borne by the borrower. Borrowers may be

charged for document preparation, appraisals,title and tax searches, flood zone searches, inspec-tion fees, tax reporting services, attorney’s fees,and origination fees. Origination fees are limitedto the greater of 1) $2,500 or 2) two percent ofthe maximum claim amount up to $200,000,plus one percent of any portion of the maximumclaim amount that is greater than $200,000.15

Notwithstanding this formula, origination feesare capped at $6,000.16 For example, the maxi-mum origination fee for a $300,000 HECM loanwould be $5,000 ($200,000�.02 + $100,000�

.01). In addition, HECM borrowers must paymortgage insurance premiums (MIP) and amonthly servicing fee. The upfront MIP for anHECM loan is equal to 2% of the maximum claimamount. The upfront MIP on a $300,000 HECMloan is $6,000. The initial mortgage insurancepremium and other costs commonly are financedwith the proceeds of the loan itself.

After the closing, a monthly MIP accrues dailyon the mortgage balance at a rate of 0.5% a yearand is paid by the lender to HUD. Borrowers alsoare typically charged a fixed monthly servicingfee, ranging from $25 to $35. MIP amounts andservicing fees are added monthly to the bor-rower’s mortgage balance.

HECM loans have been the workhorse of thereverse mortgage industry since they were cre-ated. The enabling statute and subsequentamendments have attempted to stem abusivepractices by providing borrowers with some basicconsumer protections. For example, Congresshas mandated that HECM borrowers obtain “ad-equate counseling” by an independent thirdparty before entering into a reverse mortgagetransaction.17 Congress has capped the origina-tion fee that lenders can charge to borrowers.More recently, Congress has banned the sellingof other financial and insurance products, suchas annuities, in conjunction with HECM loans.While these statutory requirements provide im-portant protections to borrowers, they are un-likely to counteract the market forces that driveinappropriate or abusive lending.

SUBPRIME REVISITED 3

III. Origins and Evolution ofReverse Mortgages

Equity conversion products such as reverse mort-gages have been around since the early 1960s. Ini-tially offered on a very limited basis by privatefinancial institutions, equity conversion loansvaried widely and were largely unregulated. Earlyproducts included shared appreciation mort-gages, reverse annuity mortgages, deferred pay-ment loans, and sale/leaseback arrangements.

Through the early 1980s, financial institu-tions, eager to take advantage of home equitygrowth among seniors, attempted to expand thereverse mortgage market. In 1980, a group of Cal-ifornia banks created a nonprofit reverse mort-gage joint venture. 18 In 1983, the nation’s firstfor-profit reverse mortgage company, AmericanHomestead Mortgage Co., was launched.19 De-spite the potential for reverse mortgages to openup a new source of income for millions of Ameri-cans, these early efforts faltered. By mid-1988,American Homestead had underwritten only1,200 loans.20 The California venture collapsedwithin a decade. 21

While private lenders were interested in exploit-ing new business opportunities, senior advocatesand academics championed reverse mortgages as a

way to reduce the impact of poverty upon elderlyhomeowners. Advocates pushed policymakers tocreate a standard equity conversion product thatwould be widely accepted by the lending industryand that would provide basic consumer protectionsfor potentially vulnerable senior homeowners.

Congress responded in 1988 by authorizing ademonstration program through which the FederalHousing Administration would provide reversemortgage insurance.22 Originally limited to 2,500mortgages, the total number of insured mort-gages under the government’s Home Equity Con-version Mortgage (HECM) program now exceeds425,000.23 The annual volume of HECM loanshas climbed rapidly over the past ten years.24 Infiscal year 2001, 7,781 HECM loans were origi-nated. By the end of fiscal year 2008, the annualvolume of HECM loans topped 112,000, repre-senting an incredible 1,300% increase in loan vol-ume in just six years. The monthly HECMvolume reached a record high in April 2009, with11,660 HECM loans originated.25

The HECM program has dominated the re-verse mortgage market since its inception, butthere have been alternatives. In 1996, Fannie Maedeveloped its own reverse mortgage—the HomeKeeper—to serve borrowers with higher propertyvalues, condominium owners, and seniors wish-


A DEARTH OF DATA

Currently, there is a dearth of publicly available in-formation on proprietary reverse mortgages. WhileHUD provides monthly reports describing basic loanand borrower characteristics for HECM loans, nocomparable information is available for non-HECMloans. The Home Mortgage Disclosure Act (HMDA),27

which provides extensive information on homemortgage applications, including approval rate, so-cioeconomic characteristics of applicants, and somemortgage pricing information, covers few, if any, re-verse mortgage transactions.

Under HMDA, reverse mortgages are subject tothe general rule that lenders must report appli-cations or loans that meet the definition of a homepurchase loan, a home improvement loan, or a

refinancing. However, the definition of refinancing is limited to “a new obligation that satisfies and replaces an existing obligation by the same bor-rower.”28 As a result, lenders would not need to report reverse mortgage transactions where borrow-ers’ homes are owned free and clear prior to thetransaction. Additionally, reporting is optional if thereverse mortgage includes a line of credit for homeimprovement or home purchase.29 These two excep-tions eliminate required reporting of most reversemortgages. Even in cases where reverse mortgagesare required to be reported, HMDA currently pro-vides no way to distinguish them from traditionalforward mortgages.

ing to use a reverse mortgage to purchase a newhome. The Home Keeper reverse mortgage wasdiscontinued as of December 31, 2008.

Private financial institutions also have offereda variety of equity conversion products, such asshared appreciation mortgages and proprietaryreverse mortgages. A widely held view is that propri-etary reverse mortgages make up approximately5–10% of all reverse mortgages originated.26 Withtoday’s sagging housing prices, frozen capitalmarkets, and new higher loan limits for theHECM program, the percentage of proprietary re-verse mortgages is probably significantly smaller.

However, economic recovery over the next fewyears is likely to reinvigorate proprietary reversemortgage products, which to date remain almostentirely unregulated.

IV. “[T]he Senior Market is a Goldmine”30

The senior population of the United States is ex-pected to grow rapidly, from 35 million in 2000 to64 million by 2025.31 Seniors are also expected to


HECM volume as of 2008

Source: U.S. Department of Housing and Urban Development, "HECM cases endorsed for insurance by fiscal year," postedon-line at www.hud.gov/offices/hsg/comp/rpts/hecm/hecm0908.xls

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

120,000

100,000

80,000

60,000

40,000

20,000

0

Fiscal Year (Oct. 1 to Sept. 30)

Num

ber

of L

oans

17

10

5

2

Dol

lars

(bi

llion

s)

Numberof LoansOriginated

Total PrincipalCommitedby Lenders($ million)

account for a growing share of the population—about 18 percent in 2025, up from 12 percent in2000.32

At first glance, seniors may not seem to consti-tute a rich market. In 2007, the median annualincome of those aged 65 and older was $17,382,or just under $1,500 per month.33 But a closerlook reveals that seniors do, in fact, possess con-siderable wealth. As one study noted, “Residen-tial real estate has grown to become the largestsingle asset class held by households with headsaged 65 or older.”34 Data from the most recentAmerican Housing Survey reveals that over 18million seniors (65 and over) own their homes.35

Approximately 15 million of those homeownersare potential reverse mortgage borrowers, includ-ing more than 12.4 million with no mortgagedebt and 2.6 million with mortgage debt of lessthan 40 percent of the value of their house.36

Reverse mortgage lenders have estimated thatseniors hold as much as $4 trillion in home eq-uity.37 Data from the American Housing Surveysupports a more conservative figure, $2.8 tril-lion.38 Regardless of where in the range the truevalue lies, there is no question that seniors—evenmany of the poorest—have significant home eq-uity available to be tapped by the reverse mort-gage industry. In 2007, the American HousingSurvey found that more than 700,000 seniors

with annual incomes below $5,000 owned theirhouses free and clear, while another 2.4 millionwith annual incomes below $15,000 had nomortgages.39 All told, more than 7 million sen-iors with annual incomes below $30,000 ownedtheir homes outright.40

That treasure trove of home equity has not es-caped the notice of lenders, brokers, and WallStreet investors.

V. A Multi-Billion DollarOpportunity

“The potential origination fees for Reverse Mortgagestoday are in excess of $42-Billion. How will you getyour share?”41

While reverse mortgage lending remains a nichein the multi-trillion dollar banking industry, ithas begun to attract the interest of banks, insur-ance companies, mortgage brokers, and WallStreet investors looking for new profit centers inthe wake of the subprime mortgage meltdown.The growing presence of these players in thisonce overlooked submarket highlights the needfor safeguards to protect vulnerable seniors andto prevent a recurrence of abuses that were wide-spread during the subprime frenzy.

The LendersIn today’s mortgage markets, lenders’ profits aredriven by loan volume, loan amounts, and inter-est rates. Reverse mortgage lenders are no excep-tion. As in the forward mortgage business, mostreverse mortgage loans have been sold to FannieMae or into the secondary market rather thanheld by lenders for investment purposes.42 Thesale of the loans allows lenders to replenish theircapital so that they can make more loans. Eachloan generates transaction fees, based in largepart on the size of the loan. Loans with higher in-terest rates garner a higher sales price in the sec-ondary market. Larger loan amounts generally


Senior Homeowners with No Mortgage

(thousands)

Family Income Range

$1–

$4,9

99

$5,

000–

$9,9

99

$10,

000–

$14,

999

$15

,000

–$1

9,99

9

$20

,000

–$2

4,99

9

$25

,000

–$3

0,00

0

2,0001,8001,6001,4001,2001,000

800600400200

0

Num

ber

of H

ouse

hold

s

produce larger fees, and greater loan volumetranslates into greater profits.

The subprime debacle showed that loan origi-nators too frequently sacrificed responsible lend-ing in the name of greater volume, higher fees,higher interest rates, and more profits. Many in-dustry analysts agree that the subprime bust re-sulted from “lenders chasing volume by relaxingunderwriting standards.”43 And, the so-called“vigorous competition” among subprime origina-tors was, in fact, a race to the bottom—a race thatled to improvident lending on a massive scale.

The same forces once at work in the subprimemarket are now growing in the reverse mortgagemarket. Competition in the reverse market isheating up, with more than 2,700 lenders offer-ing HECMs.44 According to a recent GAO report,more than 1,500 lenders originated their firstHECM loans in 2008.45 The combination of in-creased competition, volume-generated profits,and the vast number of potential reverse mort-gage borrowers is a recipe for inappropriate andabusive reverse mortgage lending.

Leading reverse mortgage lenders often touttheir commitments to responsible lending. But

with so much money to be made in the reversemortgage market, policymakers and future re-verse mortgage borrowers need to weigh lenders’claims against their past lending practices.

Some major lenders in the subprime markethave emerged as significant players in the reversemortgage niche. For example, in 2006 WellsFargo was a leading subprime lender, accordingto industry publications.46 Today they are aleader in the reverse mortgage market, originat-ing nearly 20,000 HECM loans in 2008.47 WellsFargo espouses its responsible mortgage lendingprinciples such as only making loans thatdemonstrate benefit to the borrower and a com-mitment to provide consumers with informationnecessary to make fully informed decisions aboutthe loan terms.48

Yet Wells Fargo failed to adhere to those re-sponsible lending practices in the subprime mar-ket, according to a lawsuit filed by the City ofBaltimore. The lawsuit claims that Wells Fargohad a systemic practice of steering subprime bor-rowers into bad loans.49 An affidavit from a for-mer loan officer and sales manager describes asystem in which commissions and referrals were


Leading Reverse Mortgage Lenders

Note: Figures are for 12-month period that ended May 31, 2009.Source: Reverse Mortgage Insight

0 5,000 10,000 15,000 20,000 25,000

Financial Freedom

Wells Fargo Bank NA

Bank of America NA

James B. Nutter and Co.

World Alliance Financial

Metlife Bank

Generation Mortgage

Urban Financial Group

Genworth Financial Home Equity

One Reverse Mortgage

Wholesale

Retail

“set up in a way that made it more profitable for aloan officer to refer a prime customer for a sub-prime loan than make the prime loan directly tothe customer.”50 Similarly, the Illinois AttorneyGeneral recently filed a complaint against WellsFargo alleging that the company “provided sig-nificant incentives for its employees to steer bor-rowers into subprime mortgages” and that itsfair lending policies “were only on paper.”51

Other reverse mortgage lenders have also putthemselves forward as responsible lenders. JamesB. Nutter, the second largest wholesale originatorof reverse mortgages,52 claims a pristine record ofresponsible lending. In December 2007, GeorgeLopez, a Nutter executive, told the U.S. SenateSpecial Committee on Aging that in the previousyear his firm “received no complaints of any kindrelated to unscrupulous third parties taking ad-vantage of our seniors.”53 Because of sound lend-ing principles, Lopez claimed that “the evils ofmortgage fraud and deceptive advertising prac-tices have not yet crept into the mainstream ofthe reverse mortgage industry.” Finally, Lopez as-sured the panel that “‘fly-by-night’ brokers are ef-fectively prevented from entering the market”because they must be FHA-approved.54

Just weeks before Lopez’ testimony, however,his company underwrote a reverse mortgage thatwas used to siphon multiple high fees from theequity of a vulnerable senior, according to a lawsuitfiled by the victim’s family. The lawsuit describeshow the loan was used by 87-year-old CreightonCollins, a retired truck driver with an eighthgrade education, to cash out $274,000 of homeequity, and how Collins paid the high costs typi-cal of reverse mortgages, including a $7,225 feeto the broker who arranged the loan, a $7,225 in-surance premium to the federal government, and$1,600 in charges to verify the title of the househe had owned for decades. As part of the deal,Collins was convinced to invest the loan pro-ceeds, which he had borrowed at 5.74%, in an an-nuity contract that was guaranteed to pay 3%.Collins embarked on this costly series of transac-tions after receiving counseling that, accordingto his loan documents, lasted only 47 minutes

and was done over the telephone. Five monthsafter taking out the loan, Collins was declared in-competent by local adult protective authorities.55

Lopez said in June 2009 that he had not heardabout the Collins family lawsuit, and that hestood by his Senate testimony, although he hadlater heard of some instances where reverse mort-gage loans were used to buy annuities. “That sortof stuff makes us really angry,” he said. “Onething we don’t want to see is loan officers work-ing in cahoots with financial planners.”56

Claims by lenders that they will protect the in-terest of consumers in the lending processshould be approached with caution. Without ef-fective regulation, abuses are likely to occur inthe lending process.

The BrokersHistorically, mortgage brokers served as interme-diaries who brought mortgage borrowers andlenders together. Over time, brokers’ roles havebecome more complicated. Today their compen-sation and financial incentives are often hiddenbehind a smokescreen of confusing and obtusedisclosures.

During the subprime mortgage boom, a smallarmy of mortgage brokers pushed inappropriatemortgage loans on borrowers without regard forwhether borrowers needed the loans or could af-ford the payments. The subprime bust has sentmany of these mortgage brokers flocking to thereverse mortgage business where many seniorsdepend upon them for guidance through a mar-ket that offers a welter of “educational” resourcesand presents complex product and financialchoices.

Seniors often assume that brokers have a dutyto look out for the borrower’s best interest. Butthat is not true. Because mortgage loans are con-sidered business transactions where each partyostensibly protects its own economic interest, inmany states brokers and lenders owe no fiduciaryduty to borrowers. Brokers and lenders typicallydisavow the existence of any relationship of trustand confidence between them and borrowers.


However, their marketing material is designed tobuild trust and often uses impressive-soundingcredentials to imply special knowledge and expertise.

For example, American Reverse MortgageCorp. proclaims on its website that it has “thirty-one (31) Certified Senior Advisors (CSA) on ourstaff.”57 As of December 2007, Wells Fargoclaimed to have 750 “certified reverse mortgageconsultants” to assist borrowers with reversemortgage products.58 These designations reflectexpertise with respect to senior financial mattersand reverse mortgages.59 They inspire trust andconfidence from seniors who may later be sur-prised to find out that the certified advisor orconsultant, in fact, was not obligated to look outfor their best interest.

While brokers’ marketing materials are gearedtoward building trust and inspiring confidence,the agenda for a recent gathering of reverse mort-gage lenders warned that “it will not be long be-fore fraudsters develop schemes to exploitseniors and lenders” in the reverse mortgage mar-ket.60 But there have always been thieves willingto take advantage of vulnerable seniors. For ex-ample, in November 2003, Detroit broker An-thony James showed up on the doorstep ofShirley Schultz after she called Financial Free-dom Senior Funding Corp., seeking informationabout a reverse mortgage. In January 2004,

Schultz, who was over 80 years old, took out a re-verse mortgage against her Belleville, Mich.,home and received a check for $61,325. Un-known to Schultz, James had directed the closingagent to issue a second check payable to Schultzin the amount of $42,667. James took the secondcheck, forged the endorsement on it, and de-posited it into his bank account. 62

Outright criminal conduct represents the ex-treme example of bad broker behavior. Moreoften, however, brokers take advantage of seniorsin less obvious ways, such as by selling them re-verse mortgages that they do not need or gettingthem into more costly loans that increase thebrokers’ own compensation.

As in the subprime mortgage market, brokersin the reverse mortgage market have a financialincentive to originate as many loans as possible.Brokers do not get paid if they do not close deals.The same origination fees that drive lenders tosacrifice responsible lending to profits also influ-ence brokers. In addition, brokers earn moremoney, often through yield spread premiums,when they sell reverse mortgages that will garnermore profits for lenders and investors. In un-guarded moments, even brokers themselvessometimes acknowledge that their financial in-centives can work against the interests of the sen-iors that they are “guiding.” “Needless to say,there are some products that will pay you more,and pay your customers less, while increasingoverall costs.”63 When brokers sell seniors morecostly and less favorable reverse mortgages inorder to increase their own compensation, thevalue of the senior’s lost equity can end up in thepockets of brokers and lenders.

Wall Street and the Securitization SpigotRocket fuel for the recent mortgage lendingboom came from the deals in which Wall Streetinvestment banks assembled thousands of homemortgage loans into portfolios, and sold in-vestors securities backed by promised returnsfrom those portfolios. The investment banks


A SENIOR’S “NEW BEST FRIEND”

At a hearing before the Senate Special Committeeof Aging, Carol Anthony summed up the promisesmade to persuade her 80-year-old mother to takeout a reverse mortgage:

“There would be no risk of losing her home. But there was.She would receive independent counseling. But she didn’t.All loan options available to her would be reviewed. Theyweren’t. She would never be rushed into signing anythingshe did not fully understand or was not ready to sign. Butshe was. She would not be incurring a mortgage. But shedid. All loan terms would be carefully explained. But theyweren’t. When mom signed on the dotted line, she felt thesalesman was her new best friend. But he wasn’t.”61

raked in billions of dollars of fees assembling andadministering these portfolios. Wall Street’s insa-tiable appetite for more loans to securitizeprompted lenders to offer incentives to brokersand other intermediaries to make more loansand load them up with terms that made thoseloans more profitable to investors and morecostly to borrowers.

Reverse mortgage lenders are also looking tosecuritization to supply a steady stream of capi-tal to meet the growing demand for reverse mort-gage products. The idea is one that has beennurtured by policy makers and academics. In1998, economist Dr. Nandinee K. Kutty wrotethat “[a] healthy secondary market for reversemortgages would greatly reduce risk premiumsand result in higher payments to borrowers,which in turn, would increase market accept-ance.”64 The following year Lehman Brothers un-derwrote the first securitization of reversemortgages in a $317 million deal that used pro-prietary reverse mortgages originated by Finan-cial Freedom as assets. More recently, HUDpolicy analysts noted that, “the long-term successof HECM as a more mainstream loan productmay require the eventual development of a moreefficient secondary market for these loans.”65 Not

surprisingly, the securitization of HECM loans isbecoming more common.

Historically, most HECM mortgages were pur-chased by Fannie Mae, the giant governmentsponsored mortgage finance company, whichkept those reverse mortgages in its own invest-ment portfolio.66 The first securitization ofHECM loans came in August 2006.67 From thatpoint through the end of 2007, private financialinstitutions issued about $2.2 billion in securi-ties backed by HECMs.68

In 2006, the Government National MortgageAssociation, also known as Ginnie Mae, announcedplans to create a securitization program forHECM loans. In November 2007, Ginnie Maeguaranteed its first issuance of securities collateral-ized by HECMs. Since then Ginnie Mae has securi-tized more than $1.7 billion in HECM loans.69

The growth of reverse mortgage securitizationis potentially a boon for an increasing number ofseniors who may need to cash out some of theirhousing wealth to supplement Social Security, tomeet unexpected medical costs, or to make neededhome repairs. But it is also, conceivably, a curse.Seniors, especially those with low incomes, arehard-pressed to find knowledgeable and trust-worthy advisors. On the other hand, they can ex-


UNNEEDED REVERSE MORTGAGES

Miguel and Laura Posada were both over 80 when, in2005, they were convinced to take out a $100,000 re-verse mortgage secured by the home that they hadbought with cash two years earlier, according to alawsuit they filed. As retirees who had each workedin blue-collar jobs for over 40 years, the Posadasboth had pensions and were living comfortably.They had no need to cash out their equity. ButMiguel Posada saw an advertisement for a reversemortgage and sent away a post card seeking moreinformation. He forgot about it until a month laterwhen a man showed up at his door holding the postcard. After the salesman “sat down and explainedeverything,” the Posadas decided to take it. Nowthey’re sorry they did.

The Posadas believe they wasted thousands of

dollars on fees taking out a loan they did not need.The salesman also persuaded the couple to pay$20,500 to a local attorney that they never met to purportedly “pre-qualify” them for Medi-Cal, California’s medical insurance program for low-in-come people. The salesman also sold them a 15-yeardeferred annuity paying interest at 3.5%. The interestrate on the reverse mortgage started at 6%. So thecouple borrowed money at 6% and invested it (in thedeferred annuity) to earn interest at 3.5%. They paidover $20,000 to be pre-qualified for an insuranceprogram that has no prequalifications. When thePosadas realized they had a bad deal, the lawyer refused to return their money. The Posadas have alawsuit pending against the salesman and thelawyer.70

pect to receive lots of encouragement to take outreverse mortgage loans. Unfortunately, much ofthat encouragement comes from a cast of charac-ters eerily familiar from the subprime mortgageboom and bust: aggressive brokers eager to rakein large fees and giant financial institutions hun-gry for profits that come from maximizing loanvolume. In an effort to generate a steady streamof borrowers, seniors are likely to be pushed intoreverse mortgages that they do not need. With-out adequate borrower protections, the securiti-zation of reverse mortgages and the push forgreater loan volume could lead to abusive lend-ing that will sap the equity of senior homeowners.

VI. The Marketing Machine

The growth of the reverse mortgage industry hasbeen spurred by broad marketing efforts aimedat generating a steady supply of prospective bor-rowers, thus boosting loan volume and profits. Itis well known that “push” marketing was a stapleof the subprime market.71 Using high-pressuresales tactics, lenders and brokers pushed morehome-secured debt on homeowners than theyneeded or desired. Today reverse mortgagelenders and brokers continue that push market-ing tradition.

Pushing Reverse MortgagesAdvertising for reverse mortgages can be foundon TV and on the Internet. Seniors looking intheir mailboxes or picking up their phones maybe plied with the virtues of a reverse mortgage.Also common are old-fashioned marketing tech-niques such as advertisements in senior newslet-ters and “educational” programs at senior centers.

Sellers have enlisted celebrities as spokesmento reassure seniors about these complicated andunfamiliar loans and to emphasize the pleasuresthat can be had with cashed out equity. Market-ing strategies promote reverse mortgages, not asa lifeline for retirees with low incomes, but as

a tool to increase consumption on items that are not necessities.72 A list of 25 ways to use loanproceeds recently posted on a reverse mortgagepromotion web site includes “Take a dream vaca-tion,” “Go on a cruise,” or “Travel around theworld.”73 Also on the list at number 19 is:

Lifestyle enhancement—If you always dreamed ofliving a rich and famous life, but your finances didnot give room to it, you can use the money from a re-verse mortgage to enhance your living style. You willhave more money which you can spend on luxuryitems to decorate your home and for personal luxuryitems like Rolex watches, etc.74

According to the National Reverse MortgageLenders Association, “the only limit on how youuse a reverse mortgage is your imagination.”75

One borrower profiled on the NRMLA websitetook out a reverse mortgage against his Floridahome and used the proceeds to build a single-en-gine, two-seat airplane.76

The reality is that reverse mortgages are proba-bly not the most cost effective way for well-offseniors to purchase airplanes or other big-ticketitems. But at least seniors able to make such expen-sive purchases can probably absorb the expense ofsub-optimal financing without jeopardizing theiraccess to basic necessities such as shelter, food,and medicine. The same is not true of low-in-come seniors. Urging these seniors to cash outhome equity to go on a “Shopping Spree” or pur-chase a “Dream Car” exposes them to the dangerof having nowhere to turn to raise money for fu-ture financial emergencies.

While reverse mortgages are often pitched as“free money” to use as the borrower pleases, sellersalso have sought to exploit seniors’ unfamiliaritywith reverse mortgages by implying that themoney comes from the federal government. Re-cently, Massachusetts authorities stepped in toprohibit American Advisors Group of Irvine, CAfrom mailing reverse mortgage solicitationsunder the heading “notice of 2008 governmentbenefits.”77 Undeterred by the Consent Order en-tered into with the Massachusetts Division ofBanks in 2008, American Advisors Group sent


American Advisors GroupSolicitation



the solicitation on page 12 to consumers in 2009which again referenced government benefits.78

Aggressive marketing by subprime lenderslanded many borrowers in inappropriate loansthat they could not afford. Those marketing ef-forts have moved to the reverse mortgage marketwhere many seniors may be drawn into reversemortgages that they do not need.

VII. More Payouts

Yield Spread PremiumsThe subprime mortgage crisis remains a stark re-minder of the damage that can be done when thepromise of easy money harnesses brokers to theinterest of distant Wall Street. In the subprimeboom, that promise often took the form of some-

thing unhelpfully labeled a “yield spread pre-mium.” The premiums were paid to brokers as anincentive to increase the interest rates or add pre-payment penalties to mortgage loans therebymaking those loans more profitable for lendersand investors.

Although rarely discussed with borrowers,payments of yield spread premiums were commonin the subprime mortgage market. While federallaw required an obscure disclosure of these pre-miums on the HUD-1 settlement statement, fewborrowers understood that these payments re-warded brokers for originating loans that gener-ated maximum yields to lenders and investors.79

Nor did borrowers realize that those higheryields resulted from higher fees and interest ratesthat they themselves would have to pay.

In an effort to curb profiteering in the reversemortgage market, HUD has established caps onorigination fees.80 Brokers are not permitted to

Pricing Memo


collect any additional origination fees of anykind from borrowers. However, the regulationsdo not prohibit lenders from paying additionalfees—yield spread premiums to brokers.

The industry has taken advantage of this loop-hole to increase its profits. For example, reversemortgage wholesaler Urban Financial Group,which operates under the ReverseIt.org brand, re-cently sent out a “pricing memo” that describesthe rebates paid to brokers based on the marginand monthly service fees of a loan. Not surpris-ingly, the higher the margin and higher themonthly service fee, the higher the rebate paidfrom the lender to the broker.81

Urban Financial Group is not alone in its useof yield spread premiums. W.L. Pulsipher, Presi-dent of American Reverse Mortgage, said with respect to reverse mortgage wholesalers, “every-body is offering that.”82

Yield Spread Premiums in the reverse mort-gage market pose a serious threat to consumers.Deft brokers can use “pricing memos,” and simi-lar incentives as a guide for juggling multiplevariables in a reverse mortgage transaction totake bigger and bigger bites out of consumers’equity. Senior borrowers are unlikely to under-stand the dizzying cost menu that brokers andloan originators use to generate the greatest ben-efits to themselves and potential investors.

The Annuity TrapOne of the greatest abuses of reverse mortgagescomes when loans are used to cash out seniors’home equity and that cash is used to buy expen-sive and complicated insurance policies, annu-ities, or other financial products. Many of theseproducts provide insurance agents with heftycommissions, sometimes as high as 12 percent.83

While the terms, financial restrictions, timing,and special features of contracts vary widely, theyusually involve payments to an insurance com-pany that then promises to make future pay-ments to the borrower.

A link to an annuity sale signals danger in anyreverse mortgage transaction. The combined

front-end expenses of the reverse mortgage loanand the annuity contract create a hybrid deal thatwould have to yield astronomical returns to ben-efit the borrower. In addition, the complexity ofboth products makes seniors especially vulnera-ble to the misrepresentations of unscrupulousbrokers and lenders.

The chance to sell annuity contracts is a po-tent attraction to intermediaries in a position tourge seniors into reverse mortgages. The Housingand Economic Recovery Act of 2008 included aprohibition on lenders’ ties to sellers of other finan-cial products.85 HUD has yet to issue a final rulewith respect to the cross-selling ban. However,cross-selling restrictions are likely to prove inef-fectual when weighed against the hefty commis-sions that await those who circumvent suchprohibitions and find ways to use reverse mort-gages to tap home equity to fund annuity sales. Asone insurance agent put it, “All that’s going to do isferret out the stupid players.”86 Lax enforcement byHUD and state insurance regulators87 combinedwith the absence of a private right of action for in-jured borrowers reduce the chances of gettingcaught and limit the effectiveness of the ban.

In 2006, reverse mortgage sellers got their hooksinto 80-year-old Betty Adcock. According to a law-suit filed by her daughter, Adcock had enoughmoney to pay her bills, owned various investments,and had an existing home equity line of credit thatshe had tapped for $19,000. Despite her financialstability, she was persuaded to take out a reversemortgage and to purchase a 20-year, $125,000 de-ferred annuity contract. The annuity contract pro-hibited Mrs. Adcock from withdrawing the moneywithout penalty for 10 years. And, while the annuityhad a guaranteed rate of 4.15% for the first tenyears, the starting adjustable rate on her reversemortgage was 6%. In essence, Mrs. Adcock wasconvinced to borrow money at a 6% interest rateand invest the money in an annuity that paid justover 4%. She paid $16,800 in closing costs for aloan that had a higher principal balance than herexisting home equity line of credit, that had ahigher interest rate than her existing HELOC, andthat limited access to her money for ten years.84


VIII. Proprietary EquityConversion Products

Proprietary equity conversion products havebeen around for decades. They come in a myriadof forms including proprietary reverse mortgagesand shared appreciation mortgages. The reach ofthese products has been greatest in geographicareas with high property values or rapid propertyappreciation.

As in the past, proprietary equity conversionproducts continue to be largely unregulated atthe federal level. Among states, nearly half havelaws related to reverse mortgages though thesestate statutes vary dramatically. Some statesmerely define reverse mortgages, while othersprovide more substantive protections. For exam-ple, many states with reverse mortgage laws man-date certain disclosures and ban prepaymentpenalties. Some impose a waiting period, requiremandatory counseling, or limit the fees that maybe charged to the borrowers.

Proprietary Reverse MortgagesProprietary reverse mortgages are developed andbacked solely by private financial institutions.Prior to the recent credit crunch many of theseloans—also known as jumbo reverse mortgages—were made to property owners whose propertyvalues exceeded the HECM loan limits.

Financial Freedom Senior Funding Corp. withits Cash Account Plan dominated the proprietaryreverse mortgage market for many years. Intro-duced in July 2006, Financial Freedom’s Cash Ac-count Advantage Plan was targeted at consumerswhose home value exceeded HECM’s limits orwhose type of property was excluded from theHECM program.88 Some of the key features ofthe plan were: its higher loan limits as comparedto other reverse mortgages; lump sum, line ofcredit, or combination payment options; adjustablerate; and origination fee of 2% of the maximumamount that was available to the borrower on theloan or $2,500, whichever was greater.89

Growth in Financial Freedom’s proprietaryproduct was driven in part by securitization ofthese loans by Lehman Brothers. The mortgagecrisis precipitated the collapse of Financial Free-dom’s parent company, IndyMac Corp. (nowOneWest Bank), which was taken over by theFederal Deposit Insurance Corp. in July 2008.Subsequently, the failure of Lehman Brothersbrought the securitization of proprietary mort-gages to an abrupt halt. As a result, few propri-etary reverse mortgages are being offered today.

One product that remains available is Bank ofAmerica’s Senior Equity Reverse Mortgage. Thatproduct is aimed at borrowers with houses valuedover the FHA limit (now $625,500) and up to $10million, according to Bank of America’s web site.90

Despite the low numbers of proprietary re-verse mortgages being made today, there is goodreason to anticipate growth in the future. Thegrowing senior population and its need for in-come will likely reinvigorate these loan productsin the not too distant future.91 While most ofthese products do not vary significantly fromHECMs, borrowers have none of the basic con-sumer protections that are guaranteed to HECMborrowers. Moving forward efforts should bemade to provide at least the same level of protec-tion to all reverse mortgage borrowers.

Equity Sharing Deals Like reverse mortgages, the equity conversionproducts known as “shared equity agreements”have been around for a while. Such deals entitlelenders to a certain share of any appreciation in ahome’s value between the time a loan is madeand the time it reaches maturity. While the finan-cial crisis has left sales of these products in thedoldrums, lenders say they plan to revive themwhen conditions in the capital and real estatemarkets permit.

REX & Co., a San Francisco-based lender backedby controversial insurance giant American Inter-national Group (AIG), at one point offered own-ers in at least 14 states cash in exchange for


stakes in rising house prices but announced inOctober 2008 that it would stop making newdeals.92 “We’re hoping that that’s not a perma-nent situation,” a company spokesman said.93

Another outfit called EquityKey offered simi-lar deals to senior homeowners in at least 10states, and reported that it had received morethan 500 applications through May 2008.94 How-ever, by January 2009 founder Jeffrey Nash saidthat the company had implemented a “tempo-rary funding freeze” but was still continuing toaccept applications. “We anticipate starting fund-ing again soon.”95

Equity sharing deals lack even the minimalconsumer protection provided by a counselingrequirement. Past abuses of equity sharing dealssignal that a new generation of these arrange-ments could chew up seniors’ equity with coststhey do not expect or understand. They involvefinancial calculations that are even more complexand uncertain than the cost-benefit estimates forreverse mortgages.

IX. Disclosure and Counseling:The Bulwark Against Abuse?

Existing federal laws and rules rely on loan costdisclosures and homeowner counseling as theprimary bulwark against reverse mortgageabuses. Unfortunately, the subprime crisisshowed that reliance on disclosure and informedconsumer decision-making is fundamentallyflawed as a strategy for consumer protection.

Stacks of papers that must be signed or initialedto certify that information has been “disclosed” aretoo often overlooked or misunderstood by con-sumers. A receipt of counseling certificate signedby a counselor does not even guarantee that allthe required disclosures have been made or thatall the counseling topics have been covered.

Two main provisions of existing laws aim toprotect consumers. Under the Truth in LendingAct lenders must disclose to borrowers the TotalAnnual Loan Cost (TALC) for reverse mortgages.All HECM borrowers must obtain “adequatecounseling” before entering into a reverse mort-gage transaction.

Total Annual Loan CostThe Total Annual Loan Cost (TALC) is the pro-jected annual average cost of a reverse mortgageincluding all itemized costs. TALC was developedto facilitate comparison of the costs of variousloan products to provide consumers with an “ap-ples to apples” way of evaluating and comparingthe cost of reverse mortgage alternatives.

The total annual loan cost rates are expressedas a matrix based on various projected apprecia-tion rates and loan terms. TALC costs must beprojected based on at least three loan terms: atwo year term, a period equal to the youngestconsumer’s life expectancy, and a period equal to1.4 times the youngest consumer’s life ex-pectancy.99 In addition to the loan term, TALCrates must also be based on assumed annual

VARIATIONS ON A THEME

Laverne Kidwiler was 71 years old and newly wid-owed in 1993 when she decided to give herselfsome financial breathing room by using her houseto secure a loan from something called the Provi-dential Home Income Plan. According to her son,Kidwiler received a monthly payment of $525 andshe paid an interest rate of 11.5% on the money shehad received from the plan, which by 2006 wasnearly $200,000. But after Kidwiler died in 2006,the loan servicer sent a payoff demand for$695,000.96

How did this happen? According to Kidwiler’sson, when she did the deal, she hadn’t noticedthat it came with an annual percentage rate of14.92%.97 The “real” rate of interest was so muchhigher than the nominal rate because Kidwiler wasobligated to pay interest not only on the moneythat she received but also on the increased value ofher house.98

property appreciation rates of 0 percent, 4 per-cent, and 8 percent.

In general, the TALC depends on how long theelder lives in their home, what happens to thehome’s value during that time, and the type ofloan advances. The cost is greatest when the loanis repaid within a few years after closing. The costis lowest if the elder lives beyond his or her pro-jected life span.

While TALC disclosures must be provided toall reverse mortgage borrowers, including thosewith non-HECM loans, some key assumptionsmay limit the value of a TALC disclosure for con-sumers. For example, in fiscal year 2008 approxi-mately 89% of HECM borrowers used the line ofcredit option.100 But, if the consumer has a creditline, the disclosures will be based on an assump-tion that 50 percent of the principal loan amountis advanced and that no further advances are madeduring the remaining term of the loan. Whilethis assumption provides a convenient way tocompare different credit lines, it masks the truecost of the loan that depends in large part on thesize and timing of the cash advances requested bythe borrower. And absent an estimate of the truecost of a loan, the TALC remains a highly flawedinstrument for consumer protection.

HECM Counseling RequirementTo be eligible for an HECM loan, the borrowermust obtain “adequate counseling” by an inde-pendent third party that is neither directly or indirectly associated with the mortgage transac-tion.101 Lenders are required to provide every po-tential HECM borrower with a list of at least tenHUD-approved counseling agencies.102 Five ofthese counseling agencies must be in the bor-rower’s local area or state and at least one agencymust be located within a reasonable driving dis-tance. The other five referrals must be to nationalintermediaries and multi-state organizationswhich are specified by HUD.

In order to ensure the independence of thecounselor, borrowers must initiate communica-

tion with a counseling agency on their own. In a2009 Mortgagee Letter,103 HUD indicated thatlenders who dial a counseling agency’s phonenumber and hand the phone to the borrower toschedule counseling violate the directive requir-ing borrowers to initiate contact. Similarly,lenders are not permitted to enter informationinto a web-based system that then automaticallyputs the borrower’s name in a queue to be calledby a counselor.

The HECM enabling statute details informa-tion that must be discussed with the borrowerduring the counseling session.104 Specifically,counselors are required to:

� Review options other than an HECM that areavailable to the homeowner, including otherhousing, social service, health, and financialoptions;

� Discuss other home equity conversion optionsthat are or may become available to the home-owner, such as sale-leaseback financing, de-ferred payment loans, and property tax deferral;

� Disclose that an HECM may have tax conse-quences, affect eligibility for assistance underfederal and state programs, and have an im-pact on the estate and heirs of the homeowner;and

� Review the financial implications of enteringinto an HECM loan.

In order to evaluate possible alternatives to aHECM loan, counselors must perform a budgetanalysis based on the borrower’s income, assets,debts, and monthly expenses.105

Counseling agencies may charge up to $125for the counseling session.106 The fee may be paiddirectly to the agency, or it may be paid from theborrower’s HECM proceeds at closing. Lendersare not permitted to pay HUD-approved counsel-ing agencies directly or indirectly for counselingservices.107

Responsible government officials have pointedto counseling as the best possible protection for


borrowers. “HUD believes that our frontline pro-tection against predatory lending is an informedcustomer,” said John Weicher, a HUD AssistantSecretary. “Housing counseling has proven to be anextremely important activity to educate consumersabout how to avoid abusive lending practices.”108

However, as a recent GAO report on reversemortgages demonstrates, counseling provides, atbest, limited protection for senior homeowners.Importantly, the GAO found that during limitedtesting of HECM counseling sessions, counselorsdid not cover all the information required byHUD, including alternatives to HECMs and thefinancial implications of reverse mortgages.109

Additionally, the GAO discovered that 40% of thecounselors overstated the length of the counsel-ing sessions on the counseling certificate. Forcounselors that accurately recorded their time,counseling sessions typically lasted 30 minutesto just over an hour. By contrast, an AARPfunded survey in 2006 found that counseling sessions by exam-tested counselors who followeddetailed counseling protocols took on averagetwo to three hours.110

Lenders, a major source of funding for HECMcounseling in recent years, have complained thatthe counseling requirement is a bottleneck thatreduces loan volume. In 2005, Peter Bell, presi-dent of NRMLA, told Home Equity Wire thatvolume had been pinched because borrowerswaited four to six weeks for mandatory counsel-ing: “Put simply, there aren’t enough counselorsto handle the high volume of requests.”111

Undoubtedly, the effectiveness of counselinghas been undermined by inadequate funding andthe limited availability of trained counselors.While the volume of HECM loans tripled from2004 to 2007, in the latter year HUD directedonly $3 million in funding for reverse mortgagecounseling.112 In June 2009, HUD announcedthat it had allocated $8 million for reverse mort-gage counseling as part of an overall counselingbudget that was up 23 percent over the previousyear.113 While helpful, the money for reversemortgage guidance still amounted to less than$80 per reverse mortgage, too little to pay for sev-

eral hours of in-person advice from a skilled fi-nancial professional.

Even with sufficient funding and well-trainedcounselors, the existing counseling programwould be hard-pressed to provide adequate guid-ance to seniors. With the focus on reverse mort-gage mechanics and comparisons, counselingsessions, as presently designed, fail to address thebroad financial, legal, and estate-planning conse-quences of most decisions regarding whether totake out a reverse mortgage.

Counseling may improve disclosure, but itcannot be relied upon to effectively prepare aconsumer to understand and navigate the com-plexities of a reverse mortgage deal or place itsensibly in the context of his or her own financialneeds. While the counseling attempts to em-power seniors to avoid abuses, it is no match forthe powerful market forces at play in the reversemortgage industry.

X. Recommendations: Making the ReverseMortgage Market Safe

Steps must be taken now to protect the interestsof low-income seniors and prevent the reversemortgage boom from becoming a reprise of thesubprime fiasco. To that end, this report recom-mends the following changes:

Create a suitability standard for all re-verse mortgages and equity conversionproducts. Only a fundamental shift in respon-sibility can level the reverse mortgage playingfield for financially strapped seniors who need totap their home equity. Seniors, who most likelywill only take out one reverse mortgage in theirlifetimes, frequently rely on brokers and lendersfor guidance in navigating the complex choicesassociated with reverse mortgages. Brokers andlenders routinely use impressive sounding cre-dentials to imply special knowledge and


expertise. In fact, the training of reverse mort-gage sellers emphasizes the importance of build-ing trust with potential customers. But becausemortgage loans are considered business transac-tions where each party ostensibly protects his orher own economic interests, in many states bro-kers and lenders owe no fiduciary duty to bor-rowers, and when problems arise brokers andlenders disavow any relationship of trust andconfidence with borrowers.

Some of the same market forces that rewardedvolume business with huge profits in the sub-prime market are growing in the reverse market.The subprime mortgage crisis was driven by prof-iteering among all players in the industry, whooperated without regard to their impact on thelives of millions of Americans saddled with inap-propriate mortgages. A standard of conduct thatwould require brokers and lenders to have rea-sonable grounds for believing that a reversemortgage is suitable for the borrower is necessaryto counteract market forces that favor profitabil-ity over responsible lending.

No doubt the mortgage industry will reactnegatively to any suggested suitability standard.Policy makers, however, should be wary of indus-try claims that the “sky will fall” if such a stan-dard is imposed. Industry arguments thatundefined risks created by a suitability standardwould lead to higher credit costs and a narrowingof credit options, even if true, must be weighedagainst the consequences of doing nothing. Forexample, in August 2006, advocates from the Na-tional Consumer Law Center recommended theimposition of a duty of good faith and fair deal-ing to address irresponsible underwriting, un-suitable loans, and steering in the nonprimemarket. The Mortgage Bankers Association re-sponded with a policy paper urging Congress toresist pressure to impose a suitability standardand instead allow the market to offer borrowers“unparalleled choices and competition resultingin lower prices and greater opportunities thanever before to build wealth and wellbeing thathomeownership brings.” In the wake of heavy in-dustry lobbying, neither Congress nor federal

regulators chose to adopt a suitability standardfor nonprime mortgages. Partly as a result, the na-tion is suffering the consequences of widespreadimprovident lending in the subprime market.

Yield spread premiums must be banned inreverse mortgage transactions. Yield spreadpremiums—or payments from lenders to brokersin exchange for the broker selling the borrower aloan with a higher interest rate than the borrowercould have received—were one of the key driversof the subprime foreclosure crisis. They encouragedbrokers to steer borrowers into risky, expensiveloans. In the reverse mortgage context, yield spreadpremiums incent brokers to make loans moreprofitable for lenders and investors at the ex-pense of borrowers. Within the HECM program,yield spread premiums provide a gaping loopholein the regulations designed to cap originationfees and limit the costs of reverse mortgages.

HUD has clear authority to ban yield spreadpremiums in all reverse mortgage transactions,but has refused to do so. To date, HUD has al-lowed YSPs on the theory that consumers can usethem to buy down upfront origination costs. Thereality, however, is that this trade-off rarely, ifever occurs. HUD’s recent attempt to addressYSPs through disclosure ultimately will hurtmore than help senior homeowners. The newcost disclosure required by HUD refers to theYSP as a credit, which leads consumers to thinkthey are getting a better deal with a YSP when infact they are getting a worse deal.

The only way to adequately address abusiveYSPs is through substantive change. With seniorsrelying on brokers to guide them through the re-verse mortgage process, incentives for brokers toincrease the cost of the loan for the senior home-owner should be prohibited.114

Private equity conversion products such asproprietary reverse mortgages and sharedequity agreements must be regulated. Theuse of these products, which are developed andsold by private financial institutions, has slowedto a trickle in these tough economic times. How-



ever, economic recovery over the next few years islikely to reinvigorate this market. To date, theseproducts remain almost entirely unregulated at thefederal level and subject to widely varying state reg-ulation. HECM requirements including mandatorycounseling and the prohibition on cross-sellingshould be extended to these private products.

Implement data collection on reversemortgages and other equity conversionproducts. Other than data on the insurancepolicies issued by the Federal Housing Adminis-tration under the HECM program, there is adearth of publicly available information on re-verse mortgage originations and reverse mort-gage borrowers. The primary means of collectingdata on mortgages, the Home Mortgage Disclo-sure Act, generally does not require reporting ofinformation on reverse mortgages. In addition,when information on reverse mortgages is re-ported under HMDA, the tally is merged withthat of traditional forward mortgages, making itimpossible to extract and analyze reverse mort-gage data separately.

CONCLUSION

Senior advocates and policy makers supportedthe creation of reverse mortgages as a means to

help seniors in need tap home equity that mightotherwise remain out of reach. The federally in-sured Home Equity Conversion Mortgage hasbeen a lifeline to many senior homeowners sinceits creation two decades ago. But today, the con-sumer protections built into the program arebeing eclipsed by the drive to exploit senior homeequity by major banks, insurance companies,mortgage brokers, and Wall Street investors. So-phisticated sales campaigns designed to maxi-mize loan volume target senior homeowners.This push—on the Internet, on TV, by direct mail,in senior centers, and over kitchen tables—threat-ens the financial well-being of America’s seniors.

The greatest threat looms over millions of low-income seniors with significant amounts ofhome equity. While some of these homeownersgenuinely need access to their built-up equity,that need can make them especially vulnerable tobad advice from brokers and loan officers out toput the most money in their own pockets, and inthe coffers of lenders and investors. Low-incomeseniors are also vulnerable to predators sellingoverpriced and inappropriate financial productsand services.

Federal and state governments must act nowto ensure that reasonably priced and fairly struc-tured reverse mortgages are available for thosewho truly need them, and that vulnerable seniorsare protected from predatory or abusive lendingpractices.


Notes1 John C. Dugan, Comptroller of the Currency, Remarks be-fore the American Bankers Association, Regulatory Compli-ance Conference: Consumer Protections for ReverseMortgages (June 8, 2009) at 2, available at http://www.occ.treas.gov/ftp/release/2009-61a.pdf.2 See Dep’t of Hous. and Urban Dev., HECM Cases Endorsedfor Insurance by Fiscal Year (2009), available atwww.hud.gov/offices/hsg/comp/rpts/hecm/hecm0509.xls.3 See id.4 12 U.S.C. § 1715z-20(a) (2009). 5 See 12 U.S.C. §§ 1701 to 1701z-15 (2009). 6 12 U.S.C. § 1715z-20(i)(C) (2009).7 12 U.S.C. § 1715z-20(i)(A) (2009). 8 12 U.S.C. § 1715z-20(d)(9) (2009); 24 C.F.R. § 206.17(2009).9 Housing and Economic Recovery Act of 2008, Pub. L. No.110-289, § 2122 (July 30, 2008), amending 12 U.S.C. § 1715z-20(g). HECM maximum loan limits are tied to the loan limi-tations established under the Federal Home Loan MortgageCorporation Act. See 12 U.S.C. 1454(a)(2) (2009).10 American Recovery and Reinvestment Act of 2009, Pub. L.No. 111-5, § 1204 (Feb. 17, 2009).11 12 U.S.C § 1715z-20(d)(5); 24 C.F.R. §§ 206.17, 206.21(2009).12 12 U.S.C. § 1715z-20(d)(7) (2009). This non-recourse fea-ture, however, assumes that the heirs of the reverse mort-gage borrower do not want to keep the home. If theborrower or the borrower’s family want to retain the homeafter the reverse mortgage matures and the loan balance isgreater than the value of the home, they may still be re-quired to pay the full amount of the debt even though it ex-ceeds the home value.13 12 U.S.C. § 1715z-20(d)(3) (2009); 24 C.F.R. § 206.209(2009).14 24 C.F.R. § 206.27(b)(5), (6) (2009). The lender may electto pay property taxes or hazard insurance premiums bywithholding funds from monthly payments or chargingfunds to a line of credit. 24 C.F.R. § 206.205(2009).15 12 U.S.C. § 1715z-20(r) (2009). 16 12 U.S.C. § 1715z-20(r)(6) (2009). The $6,000 limit is ad-justed in accordance with the Consumer Price Index in $500increments. 17 12 U.S.C. § 1715z-20(d)(2)(B) (2009). Counseling may notbe provided by any party that is directly or indirectly associ-ated with 1) originating or servicing the mortgage, 2) fund-ing the loan, or 3) the sale of annuities, investments,long-term care insurance, or any other type of financial orinsurance product. Id.18 Jan Shaw, Provident Credit Union Introduces Reverse Mortgage,San Francisco Business Times, Nov. 30, 1990, at 11.19 First For-Profit Reverse Mortgage Company in US Starts Businesswith Lines of Credit From Six NJ, Pennsylvania Banks and Thrifts,American Banker, Dec. 22, 1983.20 Michael Fritz, Fine-Tuning the Reverse Mortgage, Forbes, May2, 1988, at 116.

21 Shaw, supra note 18.22 See Home Equity Conversion Mortgage Insurance Dem-onstration, Housing and Community Development Act of1987, Pub. L. No. 100-242, § 417 (Feb. 5, 1988). As with allHUD-insurance programs, borrowers pay premiums for theinsurance and HUD guarantees that the lender will be re-paid, up to specified limits, for extending credit to thehomeowner. Under the HECM program, the senior home-owner is also protected by HUD in the event the lender isunable to fulfill its payment obligation.23 In 2006, the number of HECM mortgages that HUD is au-thorized to insure was raised to 275,000. Pub. L. No. 109-289, § 131 (2006). The number of HECM loans now exceedsthe 275,000 limit with 424,371 active endorsements as ofMay 2009. Under the enabling statute HUD does not havethe authority to insure additional loans. However, Congresshas temporarily extended HUD’s authority to insureHECMs notwithstanding the statutory limits. See OmnibusAppropriations Act, 2009, Pub. L. No. 111-8, § 217 (Mar. 11,2009); Consolidated Appropriations Act, 2008, Pub. L. No.110-161, § 219 (Dec. 26, 2007).24 See Dep’t of Housing and Urban Dev., supra note 2.25 See id.26 See John C. Dugan, Comptroller of the Currency, Remarksbefore the American Bankers Association Regulatory Com-pliance Conference: Consumer Protections for ReverseMortgages (June 8, 2009) at 4, available at http://www.occ.treas.gov/ftp/release/2009-61a.pdf.27 HMDA is codified at 12 U.S.C. §§ 2801–2810.28 12 C.F.R. § 203.2(k) (2009).29 12 C.F.R. § 203.4(c)(3) (2009).30 Marketing-to-Seniors.com Home Page, www.marketing-to-seniors.com (last visited July 27, 2009).31 Data compiled from U.S. Census Bureau, Age: 2000, aCensus 2000 Brief, Oct. 2001, at 6, and U.S. Census Bureau,U.S. National Population Projections (2008) at tables 2, 3,available at http://www.census.gov/population/www/projec-tions/summarytables.html, and Frank Hobbs and NicoleStoops, U.S. Census Bureau, Demographic Trends in the 20th

Century, November 2002, Table 5, parts C and D.32 Id.33 Patrick Purcell, Income and Poverty Among Older American in2007, Congressional Research Service (Oct. 3, 2008), availableat http://wikileaks.org/wiki/CRS-RL32697.34 William Apgar, Zhu Xiao Di, Joint Center for HousingStudies, Harvard University, Housing Wealth and RetirementSavings: Enhancing Financial Security for Older Americans (Sept.2005) available at http://www.jchs.harvard.edu/publications/finance/w05-8.pdf.35 U.S. Census Bureau, American Housing Survey, Table7-15: Mortgage Characteristics—Owner-Occupied Units withElderly Householder (2007), available at http://www.census.gov/hhes/www/housing/ahs/ahs07/tab7-15.pdf.36 Id.37 National Reverse Mortgage Lenders Association, 2008 An-nual Meeting and Expo “Why Attend,” available at www.nrmlaonline.org/annual2008/whyattend.aspx.38 This estimate, which predates the recent real estate crash,


was calculated using data from the U.S. Census Bureau,American Housing Survey, Tables 7-14, 7-15 (2007), availableat http://www.census.gov/hhes/www/housing/ahs/ahs07/ahs07.html. The AHS data provides median home value andmedian outstanding mortgage debt for seniors. The distri-bution of mean home values for seniors tends to be posi-tively skewed and therefore median values provide a moreconservative estimate of total senior home equity.39 U.S. Census Bureau, American Housing Survey, Table 7-19: Detailed Tenure by Financial Characteristics—OccupiedUnits with Elderly Householder (2007), available at http://www.census.gov/hhes/www/housing/ahs/ahs07/tab7-19.pdf.40 See id.41 Solicitation to attend a “Reverse Mortgage Success Work-shop” from Senior American Funding, Inc., Nov. 2, 2007 (onfile with the National Consumer Law Center).42 Ed Szymanoski, U.S. Dep’t of Housing and Urban Dev.,The U.S. HECM Reverse Mortgage Program: How Far We’ve Comeand the [sic] What the Future May Hold, July 2008, at 20–21.43 Peter Coy, Why Subprime Lenders Are In Trouble, Business-Week, Mar. 2, 2007, available at http://www.businessweek.com/bwdaily/dnflash/content/mar2007/db20070302_477856.htm.44 Government Accountability Office, Reverse Mortgages: Prod-uct Complexity and Consumer Protection Issues Underscore Needfor Improved Controls over Counseling for Borrower, GAO-09-606, at 1 (June 29, 2009), available at http://www.gao.gov/new.items/d09606.pdf.45 Id.46 See, e.g., Credit Suisse, Equity Research, Mortgage Liquiditydu Jour: Underestimated No More, March 12, 2007, at 22 (Ex-hibit 14: Top Subprime Lenders, 2006). See also Complaint,Illinois v. Wells Fargo and Company, et al., Cook CountyNo. 09CH26434 (July 31, 2009) at ¶ 35, 37 available athttp://www.illinoisattorneygeneral.gov/pressroom/2009_07/WELLS%20FARGO%20COMPLAINT_07-31-2009_13-44-30.pdf.47 See Wholesale Leaders Report, Reverse Market Insight, Inc.(Apr. 2009), available at http://www.rminsight.net/hecm-endorsement-archive/WholesaleLeaders_200904.pdf. 48 See “The Vision & Values of Wells Fargo” at p.8, availableat www.wellsfargo.com/invest_relations/vision_values (lastviewed Aug. 6, 2009).49 Complaint, Mayor and City Council of Baltimore v. WellsFargo Bank, N.A., No. 1:08-cv-62 (D. Md. Jan. 8, 2008).50 Declaration of Elizabeth M. Jacobson at ¶8, Mayor andCity Council of Baltimore v. Wells Fargo Bank, N.A., No.1:08-cv-62 (D. Md. June 1, 2009).51 See Complaint, Illinois v. Wells Fargo and Company, et al.,Cook County No. 09CH26434 (July 31, 2009) at ¶ 83, 87, avail-able at http://www.illinoisattorneygeneral.gov/pressroom/2009_07/WELLS%20FARGO%20COMPLAINT_07-31-2009_13-44-30.pdf.52 See Wholesale Leaders Report, April 2009, from ReverseMarket Insight Inc.53 Testimony of George B. Lopez, Vice President, James B. Nutter &Company, Before the Special Committee on Aging, United StatesSenate, at 4 (Dec. 12, 2007).

54 Id. at 5.55 Complaint, Collins v. James B. Nutter & Co., No. RG0945-1455 (Cal. Sup. Ct. Alameda, April 10, 2009). Additional in-formation from interview with and documents supplied byDaniel Murphy, lawyer for Collins’ family.22 Telephone interview by Rick Jurgens with George Lopez,June 2009.56 American Reverse Mortgage Corp., www.americanreverse.com/csa.htm (last visited on July 30, 2009). Certified SeniorAdvisor is a designation offered by the Society of CertifiedSenior Advisors and requires approximately three to fourdays of coursework. 57 See Wells Fargo & Wells Fargo Home Mortgage presenta-tion at the American Securitization Forum Conference, Feb.2008 (noting its 750 Certified Reverse Mortgage Consult-ants (CRMCs), available at www.sec.gov/Archives/edgar/data/1011663/000119312508017741/dfwp.htm. While notincluded on the list of professional designations tracked bythe Financial Industry Regulatory Authority, the “CertifiedReverse Mortgage Consultant” designation is offered by theNational Reverse Mortgage Training Institute. The require-ments to obtain the certification includes 36–40 hours ofclassroom instruction and 10–20 hours of self-study.59 In the insurance and securities industries, federal andstate lawmakers have sought to rein in the use of senior des-ignations that misleadingly imply expertise by apparent “ex-perts” who are little more than salespersons. In 2007, aninvestigation by the U.S. Senate Special Committee onAging found that many of the senior designations “repre-sent limited or no value with respect to advising seniors onfinancial matters, and that often these designations are ob-tained simply by attending a weekend seminar and passingan open-book, multiple choice test. Press Release, Kohl In-vestigates Use of Questionable Senior Financial AdvisorDesignations (Sept. 5, 2007), http://aging.senate.gov/record.cfm?id=281803.60 Mortgage Bankers Association of America, Agenda for Fall2008 Mortgage Lending Conference, available at http://events.mortgagebankers.org/rmlf2008/agenda.61 Statement of Carol Anthony before the United States Senate Spe-cial Committee on Aging, at 1–2 (Dec. 12, 2007), available athttp://aging.senate.gov/events/hr185ca.pdf.62 Press Release, County of Wayne, MI Office of the Prosecut-ing Attorney, Prosecutor Worthy of Charges in Connectionwith Reverse Mortgage Fraud Scheme (June 14, 2006). InFebruary 2007, James was convicted on six counts of larcenyand sentenced to state prison. See www.state.mi.us/mdoc/asp/otis2profile.asp?mdocNumber=633246 .63 Atare E. Agbamu, Your Mother Was Right: Ethical Issues in Re-verse Mortgage Lending, July 27, 2007, available at www.nrmla.org/RMS/GETTING_STARTED.ASPX?article_id=572.64 Nandinee K. Kutty, The Scope for Poverty Alleviation AmongElderly Home-owners in the United States Through Reverse Mort-gages, 35 Urban Studies 113, 127 (1998).65 Edward J. Szymanoski, et al., Home Equity Conversion Mort-gage Terminations: Information to Enhance the Developing SecondaryMarket, 9 Cityscape 1, 14 (2007), available at http://papers

.ssrn.com/sol3/papers.cfm?abstract_id=1089424#.66 See Fannie Mae Selling and Servicing Guides Announce-ment 09-16 (Jun. 1, 2009) (Fannie Mae made revisions in itspurchase policy to standardize and simplify HECM product of-ferings and encourage a market shift toward securitization).67 American Securitization Forum, Reverse Mortgages, at 12,February 5, 2008, available at http://www.mortgagebankers.org/files/Conferences/2008/2008ReverseMortgage/RM08CurrentOriginationIssuesPresentation.pdf.68 Ed Szymanoski, U.S. Dep’t of Housing and Urban Dev.,The U.S. HECM Reverse Mortgage Program: How Far We’ve Comeand the [sic] What the Future May Hold, July 2008, at 27.69 See Remarks of Michael Frenz to the National ReverseMortgage Lenders Association (Nov. 18, 2008), available athttp://www.ginniemae.gov/media/Natl_Rev_Mrtg_Lenders_Assoc_111808.pdf?Section=Media (noting as of Nov. 2008,Ginnie Mae had securitized $1.3 billion in HECM loans);Reverse Mortgage Daily, Ginnie Mae Issuance of Reverse Mort-gage Securities Holds Steady (May 14, 2009), available athttp://reversemortgagedaily.com/2009/05/14/ginne-mae-issuance-of-reverse-mortgage-securities-holds-steady/ (as ofend of April, GNMA had issued $437 million in HECM-backed securities70 Telephone Interview by Rick Jurgens with Miguel Posada;Complaint, Posada v. Walker, No. S CV 23112 (Cal. Sup. Ct.Placer, June 11, 2008). 71 Engel, Kathleen C. and McCoy, Patricia A., A Tale of ThreeMarkets: The Law and Economics of Predatory Lending. Tex. L.Rev., vol. 80, no. 6, at 1282, May 2005,available at http://ssrn.com/abstract=286649 or DOI: 10.2139/ssrn.286649.72 A report prepared by Financial Freedom Senior Funding,Corp. for the National Council on Aging stated that, “for agrowing group of seniors, reverse mortgages provide ameans to live more comfortably and pursue their dreams.For example, the funds have been used to buy everythingfrom a second car, an airplane or recreational vehicle, or tak-ing a dream vacation.” Financial Freedom Senior FundingCorp. for the National Council on Aging, Trends in ReverseMortgages—A New Option for Senior Homeowners, http://www.ncoa.org/content.cfm?sectionID=11&detail=1659 (lastvisited July 30, 2009).73 Reverse Mortgage Information Center, List of 25 Ways to UseYour Reverse Mortgage Payment Money, available at http://www.reversemortgageadviser.com/blog/reverse-mortgages/list-25-ways-reverse-mortgage-payment-money/ (last visitedJuly 30, 2009).74 Id.75 National Reverse Mortgage Lenders Association, Just theFAQs Answers to Common Questions About Reverse Mortgages,2006, at 8.76 See National Reverse Mortgage Lenders Association,Florida Senior Uses Reverse Mortgage to Build Airplane, availableat www.reversemortgage.org/BorrowerProfiles/BuildingAnAirplane/tabid/246/Default.aspx (last visited July 30, 2009).77 Regulators ruled that the mailing aimed to give the im-pression that the offer came from a government agencyrather than a loan arranger. In a consent order on Oct. 21,2008, American Advisors did not admit it had violated any

laws or rules but agreed to pay a $10,000 administrativepenalty and to change its solicitations to eliminate false ormisleading statements. See Consent Order, Commissionerof Banks, Commonwealth of Massachusetts, In re AmericanAdvisors Group, No: 2008-022-CO (Oct. 21, 2008). Reza Ja-hangiri, the president of American Advisors Group, said in athat the mailing mentioned in the October consent orderwas from “a third party marketing firm” and that the mail-ing subject to the regulators’ action was no longer used bythe firm. Telephone Interview by Rick Jurgens with Reza Jahangiri, President, American Advisors Group.78 The Massachusetts Division of Banks’ AdministrativeComplaint noted that the information contained in thefootnote was located on the reverse side of the solicitationand was in a lighter color text and set in a light background,which made the information difficult to read. See Administra-tive Complaint, Commissioner of Banks, Commonwealth ofMassachusetts, In the Matter of American Advisors Group,Docket No. 2009-016-OTSC (June 29, 2009).79 Unfortunately, new disclosure rules for yield spread pre-miums do little to fix this problem. Under the new regula-tions, yield spread premium will be disclosed as a “credit” tothe borrower. See 73 Fed. Reg. at 68,249, 68,257, codified at 24C.F.R. pt. 3500, Apps. A, C. In calling it a credit, HUD falselyimplies that the lender’s payment to the broker necessarilyprovides borrowers with lower settlement or originationcosts. To the contrary total broker compensation and settle-ment costs appear to increase when the lender pays the broker.80 12 U.S.C.A. § 1717z-20(r).81 ReverseIt, Urban Financial Group, Pricing Memo (2009)(on file with the National Consumer Law Center).82 Telephone Interview by Rick Jurgens with W.L. Pulsipher,President, American Reverse Mortgage (Jan. 12, 2009).83 Lori Swanson, the Attorney General of Minnesota, toldthe Senate Special Committee on Aging on Sept. 5, 2007that “some insurance agents make very high commissionsfor selling some of these long-term deferred annuities of upto 9 to 12 percent, plus other incentives. An agent who sellsa $100,000 annuity may receive a commission of $9,000 to$12,000 for just a few hours of work.” Senior Fraud and theSale of Annuities: Hearing Before the S. Special Comm. on Aging,110th Cong. (2007) (testimony of Lori Swanson, Att’y Gen.of Minnesota), available at http://www.gpo.gov/fdsys/pkg/CHRG-110shrg301/html/CHRG-110shrg301.htm.84 Complaint, Anthony v. Financial Freedom Senior FundingCo., No. M7 § 107 (Cal. Sup. Ct. Monterey, March 28, 2008).85 12 U.S.C.A. 1715z-20(n)(1) (“The mortgagee and any otherparty that participates in the origination of a mortgage to beinsured under this section shall: (A) not participate in, be as-sociated with, or employ any party that participates in or isassociated with any other financial or insurance activity; or(B) demonstrate to the Secretary that the mortgagee or otherparty maintains, or will maintain, firewalls and other safe-guards designed to ensure that—(i) individuals participatingin the origination of the mortgage shall have no involve-ment with, or incentive to provide the mortgagor with, anyother financial or insurance product; and (ii) the mortgagorshall not be required, directly or indirectly, as a condition of


obtaining a mortgage under this section, to purchase anyother financial or insurance product.”) 12 U.S.C. 1715z-20(o). (“The mortgagor or any other party shall not be re-quired by the mortgagee or any other party to purchase aninsurance, annuity, or other similar product as a require-ment or condition of eligibility for insurance…”) 86 Telephone Interview by Rick Jurgens with Neil Granger,Aug. 4, 2009. 87 The GAO found that “at least 26 states have adopted theNational Association of Insurance Commissioners (NAIC)model regulation for suitability in annuity transactions”and that “at least 10 other states have adopted other legisla-tion or regulations related to the suitability of insuranceproducts.” However, more than half these states do not pro-vide the consumer with a private right of action to enforcethis suitability standard. See Government AccountabilityOffice, supra note 44, at 28.88 See Tammy Kraemer and Tyler Kraemer, The CompleteGuide to Reverse Mortgages, Adams Media Corporation ch5 (2007) (“Because Financial Freedom is the largest reversemortgage specialist, its Cash Account Advantage Plan pro-vides a good example of proprietary jumbo reverse mort-gages.”)89 Id. at 63–64. See also Financial Freedom Cash Account Ad-vantage Plan, FAQ, available at http://www.financialfreedom.com/Templates/Print_Products.aspx#FF_CASH_ACCOUNT(last visited July 31, 2009).90 See Bank of America Home Loans, Bank of America Propri-etary Product, http://reversemortgage.bankofamerica.com/details/how-reverse-mortgages-work/senior-equity-reverse-mortgage-platinum.aspx (last visited July 31, 2009).91 See Dugan supra note 1, at 4–5.92 Kathleen Pender, S.F. Firm stopping new deals on equity, S.F.Chron., Oct. 16, 2008, at C1. See also REX & Co. website atwww.rexagreement.com/index.php/rex/who_we_are_coverage_map/93 Telephone Interview by Rick Jurgens.94 See EquityKey, Overview, Coverage Map & Timeline,www.equitykey.com/overview (last visited July 30, 2009).95 Telephone Interview by Rick Jurgens with Jeffrey Nash,Founder, EquityKey (January 2009). Those prospects seemedto dim in July 2009, after EquityKey’s parent company, KBCGroup, a large Belgian bank, announced that it was “con-ducting a company-wide review of its operations and de-ployment of capital” and shutting down its U.S. reversemortgage unit. Notice, Senior Lending Network, www.seniorlendingnetwork.com (last visited July 21, 2009).96 Id.97 Telephone interview by Rick Jurgens with Marvin Kidwiler.98 Loan Closing Documents provided by Marvin Kidwiler(on file with National Consumer Law Center).

99 Reg. Z, 12 C.F.R. § 226.33(c)(6) (2009).100 See Government Accountability Office, supra note 44, at 8.101 12 U.S.C. § 1715z-20(d)(2)(B) (2009). Counseling maynot be provided by any party that is directly or indirectly as-sociated with 1) originating or servicing the mortgage, 2)funding the loan, or 3) the sale of annuities, investments,long-term care insurance, or any other type of financial orinsurance product. Id.102 See 12 U.S.C. 1715z-20(f); Dep’t of Housing and UrbanDev., Mortgage Letter 2009-10 (March 27, 2009).103 Dep’t of Housing and Urban Dev., Mortgagee Letter2009-10 (Mar. 27, 2009).104 12 U.S.C. 1715z-20(f) (2009).105 Dep’t of Housing and Urban Dev. Mortgagee Letter 2009-10 (Mar. 27, 2009).106 Dep’t of Housing and Urban Dev., Mortgagee Letter2008-12 (May, 6, 2008).107 Dep’t of Housing and Urban Dev., Mortgagee Letter2008-28 (Sept. 29, 2008). Lenders previously were permittedto pay for borrower counseling through a lump sum or on acase-by-case basis. However, the independence requirementfor counseling imposed by the Housing and Economic Re-covery Act of 2008, now precludes such payments. 108 Hearing Before the S. Special Comm. on Aging (2004) (state-ment of John C. Weicher, Ass’t Sec., Dep’t of Housing andUrban Dev.). Statement of John C. Weicher, Assistant Secretary,Department of Housing and Urban Development, before the UnitedStates Senate Special Committee on Aging, (Feb. 24, 2004).109 Government Accountability Office, Reverse Mortgages:Product Complexity and Consumer Protection Issues UnderscoreNeed for Improved Controls over Counseling for Borrower, GAO-09-606, at 30-47 (June 29, 2009), available at http://www.gao.gov/new.items/d09606.pdf.110 Donald Redfoot, Ken Scholen and S. Kathi Brown, AARP,Reverse Mortgages: Niche Product or Mainstream Solution? Reporton the 2006 AARP National Survey of Reverse Mortgage Shoppers(2007), at 90–95, available at http://assets.aarp.org/rgcenter/consume/2007_22_revmortgage.pdf.111 2005 Record Year for FHA Reverse Mortgage, Home EquityWire, Nov. 15, 2005.112 Abt Associates Inc. for Dep’t of Housing and Urban Dev.,Office of Policy Development and Research, The State of theHousing Counseling Industry, September 2008, at 143.113 Dep’t of Housing and Urban Dev., HUD Offers $58 Millionfor Housing Counseling, New Release HUD No. 09-088, June 16,2009, available at www.hud.gov/news/release.cfm?content=pr09-088.cfm.114 A New Hampshire law that took effect July 31, 2009 banspayment of a yield spread premiums in any reverse mort-gage transactions.
