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After sub-prime comes ‘old prime’ crisis
Reverse mortgages sold to retired people threaten a new bubble
As if lending to under-qualified borrowers hadn't caused enough damage already to the global financial system, mortgage companies have expanded into a new area of lending that could prove equally unstable.
US watchdogs yesterday highlighted the growing dangers of so-called 'reverse mortages' sold to retired people looking to unlock cash from the value of their homes. In the US, the loans are available only to borrowers aged 62 and over and are aggressively marketed by brokers looking to collect fees. The loan is repaid, with compound interest, when the borrower dies or moves.
With the Tory party proposing to put the age of retirement up to 66 from 2016, increasing economic pressure on retired people is becoming cause for concern on both sides of the Atlantic.
According to the US National Consumer Law Center, reverse mortgage loans are being sold to America's grannies with many of the same techniques and abuses that drove unqualified borrowers to take on sub-prime mortgages with onerous interest payments.
Authorities fear a similar bubble could be inflating. "It's a scary mix because you have a financial instrument that's complicated, combined with aggressive marketing to the most vulnerable in our society," Senator Claire McCaskill of Missouri said yesterday.
The system, critics charge, is open to abuse. Some lenders are deceptively marketing them as "government benefits" or promote them as a way for pensioners to enjoy the high life now and essentially burn through assets that may be needed later - or passed on to their children.
Regulators say they've seen an increase in reverse mortgage fraud in which speculators buy cheap, dilapidated property only to sell them on to pensioners willing to take out loans at inflated valuations. Since the loans are insured by the government, taxpayers could end up with the bill if the sale price doesn't cover principle.
The FBI's mortgage fraud unit says it is looking at cases involving "hundreds of properties".
Despite being an expensive way to borrow - reverse mortgages are called "rising debt" loans because the interest is added to the principle which then accrues further interest - the loans are increasingly attractive to pensioners who have seen their savings hit.
In one instance in San Jose, California, a pensioner found she owed $601,000 even though she'd only received about $120,000 - roughly what the house was worth. Despite the dangers, American pensioners are looking to spend now, worry later - or leave such worries to beyond the grave. A total of 112,000 reverse mortgages were sold in 2008, up from 43,082 in 2005. This year, the figure could reach 180,000.
Once all the money has been spent on cruises and winter holidays, America's newest generation of problem borrowers may also be its eldest. ·
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Why do all our financial woes seem to come from America? Answers on a postcard please.
When will the American society learn some common sense and start living within their means.
Everything seems to be based on personal gratification and easy living. One wonders how this country rose to such prominence when it is predominantly inhabited with folks that have absolutely no understanding of how money works.
On top of that, every shark is out to steal and pillage with no conscience or morality.
It is time for these folks to experience what they have dished out on the rest of the world with their greed and hagemony.
Edward Helmore needs to be reminded, to brush up on the typical tripwires of his native (!) language: "... if the sale price doesn't cover principle [sic]."
Because he commits to the same mistake twice in the above article (it's 'principal' for those, who don't know what I'm talking about, thus the basic value sans fees and interest), it's quite apparent, that this is not just a typo.
So, Edward, get going with the proofing -- spell checkers ain't cutting it with the English/American language(s).