Housing bill pits AARP against life insurers

The financial services industry is dueling the AARP over language in the Senate housing bill that would affect a small but rapidly growing corner of the mortgage market.

At issue is a provision that would prevent providers of so-called reverse mortgages, a government-backed loan designed to help cash-strapped seniors tap into their home equity, from selling borrowers another investment for the proceeds of the loan.

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Life insurers and other providers of reverse mortgages contend that barring such cross-selling amounts to undue interference in their relationships with consumers.

But the backers of the provision, which was introduced by Sen. Claire McCaskill (D-Mo.), say the measure is necessary to protect poor seniors from abusive marketing that could cause them to squander one of their few remaining assets.

“You’re already spending a lot of money to get the money from the reverse mortgage. So to turn around and get another financial product that costs more money doesn’t make sense,” AARP’s legislative policy director, David Certner, argued.

In a reverse mortgage, homeowners convert a portion of their home equity into cash, which can come in a lump sum or in a stream of payments. When borrowers leave their home, they or their estates must pay off the loan and any accrued interest. Usually, this is achieved by selling the home.

Created in 1990 by the Federal Housing Administration (FHA), reverse mortgages have come under scrutiny amid reports of older homeowners being duped into inappropriately investing the proceeds of the loan into another product, often deferred annuities or long-term care insurance.

In some cases, the elderly were sold annuities that weren’t set to mature for more than a decade even though they needed the money immediately.

A provision of both the House and Senate housing legislation would forbid the tying of reverse mortgages to other financial products. It has the support of the financial services industry.

However, the industry strongly opposes language, passed by the Senate in April, that would require life insurers and lenders to erect firewalls to prevent the sale of any financial product in connection with the reverse mortgage. Under the legislation, homeowners would have to go to a separate financial services firm if they wish to invest the proceeds of the loan.

That goes too far, argues Jack Dolan, a spokesman for the American Council of Life Insurers (ACLI).

“We certainly are aghast at some of the reports that we’ve seen, but you can’t throw the baby out with the bathwater,” he explained.

He added, “It’s an interference with a long-term relationship … You’re telling [consumers] at this late stage in life to find another trusted financial adviser.”

The vast majority of reverse mortgages are guaranteed by the FHA, which steps in to make the lender whole in the event that the amount owed on the loan exceeds the home’s value.

The loans are subject to strict guidelines and are limited to homeowners 62 and older. Because they carry high fees, they are seen as a last resort for borrowers with few options for raising cash. Borrowers must pay 2 percent for the FHA insurance in addition to a 2 percent origination fee. They also pay interest on the loan.

While a niche product, reverse mortgages have grown rapidly in recent years. Since 1990, roughly 400,000 government-backed reverse mortgages have been originated. But more than half of those loans were made since the end of 2005.

Homeowners use reverse mortgages to pay medical bills and other debts or supplement their income.

According to a spokesman for the National Reverse Mortgage Lenders Association , borrowers have staved off foreclosure by using the proceeds of a reverse mortgage to pay down an existing mortgage.

AARP and other backers of McCaskill’s legislation argue that the measure won’t prevent older homeowners from investing the proceeds of their reverse mortgage, as they can do so with another financial firm.

They contend, however, that reverse mortgages shouldn’t be used in conjunction with other financial products. “Because of the high fees associated with taking out a reverse mortgage, an investment would have to have an extremely high return in order for a senior to come out ahead in the end,” Maria Speiser, a spokeswoman for McCaskill, said.