For good reasons, it is open season on Wall Street, bankers and their sidekicks in the mortgage-lending food chain, but Americans still value balance and fairness in their public discourse. That is why I believe “Sub-Prime Revisited,” the ‘report’ released on Oct. 6 by the National Consumer Law Center, is a one-sided editorial with a regulatory policy agenda built on generalizations and extrapolations. Underlying the 28-page report is an insidious and condescending subtext: Reverse mortgage lenders and brokers are crooks and seniors need more government protection because they are stupid. Seniors are smart, and most reverse mortgage lenders and brokers are decent, ethical professionals.
Let’s look at the ‘revelation’ that major sub-prime lenders have recently migrated to reverse mortgages to reap profits lost in the sub-prime bust. While it is conceivable that some ‘sub-prime’ lenders have jumped into reverse mortgages, the major lenders mentioned in the report are reverse mortgage pioneers. Wells Fargo’s involvement in reverse mortgages dates back to 1991 through Directors Mortgage Corporation in California.
Directors Mortgage Corporation was one of 50 lenders selected in a lottery for the original Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) pilot program. Directors Mortgage was subsequently swallowed by Norwest Mortgage, which later merged with Wells Fargo. So Wells Fargo is not a new player in reverse mortgages, neither is James B. Nutter Company. James B. Nutter Company originated the first FHA reverse mortgage in 1989. It is a conservatively-run, family-held FHA lender that, to my knowledge, was not a ‘sub-prime’ lender.
It’s no secret that Wells Fargo was a major sub-prime lender through its sub-prime unit, but does that mean its reverse mortgage division (as well as its other business units) should be called into question for the alleged wrongdoing of its sub-prime unit? Should the consumer advocacy industry and consumer advocates be lambasted because of ACORN’s recent troubles?
According to the report, James B. Nutter Company underwrote a reverse mortgage for a borrower that was later sold abusive annuity contract(s) by third-parties unrelated to James B. Nutter Company. Yet the ‘report’ makes James B. Nutter Company look sinister for doing its legitimate business of underwriting reverse mortgages. In other words, if you get mugged at home after withdrawing a pile of cash from your neighborhood bank, the bank, not the muggers, is responsible for your misfortune. This is the kind of ‘logic’ that permeates the much-hyped NCLC ‘report.’ [Full disclosure: I have never worked for (or brokered a reverse mortgage loan through) Wells Fargo or James B. Nutter Company].
Among other generalizations, the ‘report’ regurgitates “reverse mortgages are complicated” misconception. Reverse mortgages are simply home equity loans without monthly repayments. They are no more “complicated” than traditional forward mortgages or other forms of financing. It is true that they are different and shrouded in misinformation fed by half-baked reports, such as “Sub-Prime Revisited.”
Furthermore, the report looks like an attempt to find evidence for U.S. Comptroller John Dugan’s unfortunate remark in June, comparing reverse mortgages with “sub-prime.” As I wrote then in response to Mr. Dugan, “If sub-prime loans had the layers of consumer protection built into reverse mortgages, there would have been no ‘sub-prime crisis.’”
In an Oct. 16 Webcast on AARP’s “Inside E Street,” hosted by Sheilah Kast, Rep. Barney Frank of Massachusetts, chairman of the House Financial Services Committee, dismissed Dugan’s sub-prime analogy, declaring that, with reverse mortgages, the “evidence and results are different from sub-prime.” Rep. Frank drew Kast’s attention to the new layers of consumer safeguards wired into reverse mortgages under the Housing and Economic Recovery Act (HERA) of 2008, such as the cap on lender/brokers fees and the prohibition on cross-selling reverse mortgages with annuities and other financial products. See the link to the AARP Webcast online by clicking here.
The Great Recession of 2008-2009 had deeper philosophical, systemic and socioeconomic roots than the excesses of the sub-prime mortgage industry. Even Federal Reserve Chairman, Ben Bernanke, has conceded this point:
“But we know now this was much bigger than sub-prime lending. It was a credit bubble much more broadly construed. The sub-prime crisis triggered a much broader retreat from credit and risk-taking. It became a much bigger deal than I anticipated. And to top of that, we didn’t—nobody really did—understand the interconnections of off-balance sheet vehicles and complex credit derivatives and all those other things that followed.”1
Clearly, an October 2009 report that had to go back to 1993, 2005 and 2006 to find isolated anecdotal evidence of alleged wrongdoing has no legs to stand on. Mind you, I do not minimize the gravity of the three or four instances of alleged wrongdoing mentioned in the report. Our legal system can handle them.
For some perspective on HECM and reverse mortgages, let’s consider these facts:
► HECM reverse mortgages and the reverse mortgage industry have been around for 20 years this year.
► With more than 500,000 HECMs and proprietary reverse mortgages originated, there has been no crisis in 20 years.
► With the exception of Ginnie Mae’s HECM mortgage-backed securities (HMBS), there has been no securitization of reverse mortgages since 2006 (the ‘report’ says “securitization [a sinister tool in its view] … is becoming commonplace in the reverse mortgage industry.
► Securitization of proprietary jumbo reverse mortgages dates back to 1999, and “No securitized reverse mortgage classes have suffered any ratings downgrades because the rating agency criteria are very conservative.” [Joseph J. Kelly and Michael McCully, pioneers in reverse mortgage securitization in the U.S., soon to be published article for my “HECM at 20” Series]
► A major, detailed AARP-sponsored 208-page national report on reverse mortgages in 2007 said that nine out of 10 senior homeowners were “satisfied with their experience with their reverse mortgage lenders,” (“Reverse Mortgages: Niche Product or Mainstream Solution?” page 86). These are the same lenders and brokers that the NCLC ‘report’ called “predators.”
► In the AARP national report, customer satisfaction among those who became reverse mortgage customers was even higher, as 93 percent were satisfied, 78 percent very satisfied, and 15 percent somewhat satisfied (page 86).
► Here is the home run: “Even [senior] homeowners who did not become borrowers gave lenders positive ratings, as 75 percent were satisfied, of whom 47 percent were very satisfied, and 28 percent somewhat satisfied” (page 86). Again, these are the same lenders and brokers the NCLC ‘report’ calls “predators” in 2009 with isolated anecdotal evidence from 1993, 2005 and 2006.
The 2007 AARP national report findings on senior homeowners’ satisfaction with reverse mortgages and reverse mortgage lenders and brokers are consistent with previous studies attributed to Fannie Mae and others on customer satisfaction with reverse mortgages. There are probably not many products in the world with customer satisfaction consistently in 90 percent plus range.
Yes, there is evidence of reckless marketing. Yes, there is potential for senior abuse in the industry as in any other industry catering services or goods to seniors. And yes, reverse mortgage investors, lenders and brokers are driven partly by the profit motive. In America, there is nothing wrong with legitimate profit! To assert without qualification that reverse mortgage lenders and brokers are “predators” who are out to steal seniors’ home equity, as the NCLC report suggests, is grossly unfair because the industry is full of committed, passionate, decent, idealistic do-gooders who go the extra mile everyday to help seniors and their families.
Because they strike fear and create confusion in seniors and their families about reverse mortgages, these irresponsible and inaccurate “reports” and the me-too articles they generate in the media are hurting seniors and their families who are in dire need of cash and for whom reverse mortgages may be the only option.
he NCLC report is a disservice to the cause of a balanced civic discussion on how to make reverse mortgages and the reverse mortgage industry stronger for baby boomers’ (and for America’s) financial health in an era of uncertain retirement finance. It is the cheapest of cheap shots.
Author and columnist, Atare E. Agbamu, CRMS is director of reverse mortgages at Minneapolis-based AdvisorNet Mortgage LLC. A member of the BusinessWeek Market Advisory Board, Agbamu is author of Think Reverse! and more than 100 articles on reverse mortgages. Through his advisory firm, ThinkReverse LLC, Agbamu advises financial professionals, institutions and regulators across the country. In a 2007 national report on reverse mortgages, the AARP cited Agbamu’s work. He can be reached by phone at (612) 436-3711 or (612) 203-9434.
1-Wessel, David. In Fed We Trust (New York: Crown Business, 2009), page 129.