Reverse mortgages could be the next subprime mortgage product to experience rapid growth while taking advantage of a vulnerable segment of the population, top U.S. bank regulator John Dugan said on Monday.
Dugan, who heads the Office of the Comptroller of the Currency and supervises some of the nation’s largest banks, said regulators are crafting guidelines to ensure that robust consumer protections are in place for reverse mortgages.
"While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages — and that should set off alarm bells," Dugan said in prepared remarks to an American Bankers Association conference.
While the majority of reverse mortgages are insured by the Federal Housing Administration, Dugan said that proprietary reverse mortgage products offer less consumer protections.
Dugan said that as the elderly American population grows, there could be a significant pickup in demand for proprietary reverse mortgages, which he said bear significant similarities to the type of subprime products that helped fuel the housing boom and bust, resulting in a widespread credit crisis and recession.
"I believe the critical lesson here is the need to act early, before problems escalate," Dugan said. He said regulators need to set more standards for proprietary reverse mortgages. Regulators also need to be vigilant about misleading marketing and need to crack down on any lenders who try to bundle a reverse mortgage with other
financial products, such as an annuity or life insurance product, Dugan said.
If those actions are not enough, Dugan said "more definitive regulatory standards may need to be adopted, and the OCC is prepared to do that."
Update: The Wall Street Journal is reporting that Dougan said taxes and insurance costs for reverse mortgages should have to be escrowed to ensure the consumer has the money to pay those costs.
