the midst of the ongoing financial crisis, reverse mortgages have been[/b] among the very rare beams of bright sunlight. However, a rumble of distant thunder is starting to become audible amid the glow surrounding reverse mortgages, and the industry has reason to be concerned. Last month, Department of Housing & Urban Development Secretary Shaun Donovan announced that he wanted to obtain $800 million in congressional funds to prop up the Federal Housing Administration's (FHA) reverse mortgage program. Last week, Comptroller of the Currency John C. Dugan declared that reverse mortgages pose significant compliance risks that require proactive input from regulators to ensure the safety and soundness of the product. Reverse mortgages have been around for decades, but their potential has never truly been tapped until the past few years. The current crisis has placed a much brighter spotlight on the product, which is not surprising, considering the rising number of senior citizens and the manner in which the recession has played havoc with their retirement savings and daily finances. To date, there has been very little open expression of apprehension regarding the viability and security of the product. However, both department heads have strong reason to be concerned about problems with reverse mortgages. For Donovan, it is an in-house issue: 90% of all reverse mortgages are home equity conversion mortgages (HECMs) insured by the FHA, a division of HUD. Absent the abrupt return of a private market, the federal government is literally the only game in town when it comes to building this sector to its fullest capacity. Yet the government is running up historic debts in trying to control the hemorrhaging from the financial services industry, and the very last thing it needs is another bottomless money pit. As for Dugan, risk management and compliance issues relating to reverse mortgages have brought him front and center – a position that he has rarely taken since taking office in August 2005. Speaking at an American Bankers Association conference last week, Duggan talked about the excessively positive promotion of reverse mortgages – a bit of marketing overkill that he severely deflated by dropping the industry's epithet, the "S-word." ‘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,’ he said, adding that the experience "clearly demonstrates the link between compliance and safety and soundness.’ Dugan also broke another taboo by openly calling on a neighboring federal agency to get moving on the subject – in this case, Donovan's agency. "Given the predominance of the HECM product in reverse mortgage lending, I think it would be a major step forward for HUD to issue guidelines or requirements addressing the escrow issue for HECMs, and I would like to begin a dialogue with them on the issue," he added. The industry should not be a quiet spectator to this situation. As more originators begin to offer reverse mortgages, there needs to be an industry-wide, coordinated effort to ensure that no red flags are raised over issues of safety and security. Self-policing has not traditionally been a strong point within the industry, but with reverse mortgages, there needs to be a proactive – and not reactive – effort to guarantee that all concerns relating to risk management, compliance, due diligence and quality control are fully addressed. Key to this effort is ensuring that all of the HECM eggs don't go in a single federal basket. The return of a private market is essential to encourage a secondary marketing future for this product. It is incumbent upon the industry to explore all possibilities – and, perhaps, invent a few new ones – to encourage the weaning away from federal over-dependency. Here's an idea: In the manner that the warehouse lending sector has its Warehouse Project to actively pursue solutions to that problem spot, perhaps a Reverse Mortgage Project is needed to address the concerns raised by Dugan in regard to risk and compliance. This will demonstrate that the industry is ahead of the problem (for once) and is serious about not having a reprise of the subprime debacle. I do not believe that the reverse mortgage sector is veering into an abyss. But the fact that Donovan and Dugan are expressing concerns should give everyone reason to pause and ascertain that the rumbles of distant thunder remain in the very far distance. – Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b]. [i] (Please address all comments regarding this opinion column to hallp@sme-online.co
