Reverse Mortgage Programs Lack Safeguards, GAO Says

The Department of Housing and Urban Development has left elderly borrowers vulnerable to abusive lending practices because of shortcomings in programs that offer reverse mortgages, according to a report released yesterday by the Government Accountability Office.

Reverse mortgages, which are usually backed by HUD's Federal Housing Administration, enable seniors to withdraw equity from their homes. The loan and the accumulated interest do not have to be paid back until the owner dies or sells the home. But the upfront costs are substantial.

While these loans have become more attractive to seniors as the economy has soured and housing values have dropped, reverse mortgages are complex. That is why the FHA has long required that the seniors take part in HUD-approved counseling sessions before these loans are processed. Yesterday's report concluded that HUD "lacks effective controls" over the counseling programs.

Based on undercover participation in 15 counseling sessions, the GAO found that the counselors conveyed accurate information but none covered all of the mandatory topics and some exaggerated the length of the counseling sessions, which can be conducted by telephone or face-to-face. The report also said that seven of the 15 did not discuss alternatives to reverse mortgages, as required.

The report, requested by Sen. Claire McCaskill (D-Mo.), also said that a limited review of reverse mortgage marketing materials found some misleading claims. Federal agencies responsible for protecting borrowers had reported few complaints.

Some of the states that the GAO contacted also reported cross-selling, the practice of enticing borrowers to use their mortgage funds to buy insurance or other products that are not suitable for them. Recently enacted federal law aims to curb such practices as do some state laws.

HUD spokesman Brian Sullivan said the reverse mortgage program has more safeguards, such as required counseling, than do private home loan programs. "These existing consumer protections have contributed greatly to the success of the [reverse mortgage] program, which has provided financial security to several hundred thousand seniors," he said.

In the first quarter, the FHA backed about $7.8 billion worth of reverse mortgages, the largest amount in any quarter since the agency launched the program in 1988, according to the trade publication Inside Mortgage Finance.

Nearly two months ago, the FHA announced its plans to ask Congress for nearly $800 million in taxpayer money to cover projected losses on reverse mortgages in fiscal 2010.

The losses are not related to fraud but to falling home values, HUD Secretary Shaun Donovan said at the time. That's because by the time a reverse mortgage needs to be repaid, the value of the house could have dropped and the FHA-insured lender is left with no choice but to recoup less money than it loaned out.

Donovan said the Obama administration is requesting a subsidy instead of raising charges for seniors.