The warning bells sounded pretty loud and clear earlier this month when a top banking regulator compared the potential risks of reverse mortgages with the subprime lending crisis.

In a speech to bankers, John Dugan, comptroller of the currency, warned of concerns that seniors may fall victim to marketing pitches and investment schemes and be unaware of the high cost structure of these complicated financial instruments.

"I am struck by some of the similarities to the risks of subprime mortgages: a vulnerable customer class; complex product features that can be difficult to explain and can be susceptible to deceptive marketing; nontraditional, asset-based underwriting; and the potential for skewed incentives for key distributors of the product," Dugan said.

To reverse mortgage lenders, them's fighting words, particularly since the loan product -- and by extension their bottom line -- is expected to grow in popularity as the population ages.

In the next decade, more than 55 million people will be at least 62 years old, the minimum age at which a homeowner can receive a home equity conversion mortgage, a Federal Housing Administration-guaranteed loan. Reverse mortgages, the majority of which are HECMs rather than privately backed, let homeowners borrow against the value of their home and not repay the funds until the homeowners sell the home, permanently move out or die.

Last year, there were more than 115,000 such loans made, compared with less than 22,000 five years earlier, in 2003. In April alone, 11,660 loans were made, a new monthly volume record, according to the National Reverse Mortgage Lenders Association.

The increase comes despite the fact that home values have slumped, which means that seniors aren't able to tap into as much equity as they could one, two or three years ago. Unfortunately, with times being tough and retirement nest eggs shrinking, they need the funds more than before.

Atlanta-based Generation Mortgage, which closed 1,405 HECMs during the year's first quarter alone and expects those numbers to only increase, came out swinging a few days after Dugan's speech as executives sought to defend the industry and the product.

"The whole purpose of our program is to make loans to seniors who don't fit into the traditional market," said Jeff Lewis, Generation Mortgage's chairman. "Pointing that out as a harbinger of doom is ludicrous. Without this product, if people couldn't get to the money in their house, they'd just have to sell them.

"It's a complicated instrument but it's not an instrument that takes advantage of anybody."

AARP begs to differ, based on anecdotal reports it's received from seniors who've been targeted by the unscrupulous once they've received a reverse mortgage. Their concern is that predatory lenders, now that they've been shut down in traditional mortgage loan markets, may be turning their attention to seniors and reverse mortgages.

"It's not the loans themselves that are problematic," said David Certner, AARP's legislative policy director. "The issue that is coming up in this environment is what is happening with the proceeds that people are getting with these loans."

Certner said one issue that has surfaced is with people trying to sell borrowers on annuity products, which for a senior functions similarly to a reverse mortgage payout. Another problem is attempts to get seniors to use their proceeds to purchase pricey long-term care insurance. It makes more financial sense for a senior to use a reverse mortgage payout for long-term care than for a long-term care policy.

In his speech, Dugan said making sure lenders adhere to current compliance standards may not be enough and that additional regulation protecting consumers may need to be put in place.

Until then, it's up to seniors and the people who care about them to make sure everything stays above board. To get a primer on how reverse mortgages work and what factors to consider from AARP, rather than a lender with a stake in the decision, go to aarp.org/money/personal/articles/reverse_mortgage_basics.html.
mepodmolik@tribune.com