Reverse Mortgages: “should be banned”
SMH reports that Steve Keen, author of ‘Debt Watch’, has called for Reverse Mortgages to be banned. Money quote:
“I want them abolished. [They represent] a systemic danger to the banking system. [With reverse mortgages] the banks are building in an expectation of continued asset price inflation for the next 25 years,” Keen says.
Hyperbole aside, Reverse Mortgages present a much different challenge to financial institution, renowned for penny pinching and walking over their own mothers for profit (in this case, it’s grandmothers, of course). Mortgages are simple. You find people who have a high percentage chance of repaying the loan, you give them money, and you let them speculate. If the property dives in value, its not really the banks problem, the speculation was performed by the borrower, thus the risk lies with him. Trying to standardise speculation is fraught with danger, as the US has found out with the sub-prime debacle. The problem is, mortgages rely on minimising red tape, keeping transaction costs low. Reverse mortgages will not have this luxury. Banks will now have to survey home prices, future interest rates, and their own balance sheet to determine whether a reverse mortgages is a profitable move. The best people to do this get paid in excess of $200,000 a year, and work with much more prestigious titles than ‘Mortgage Broker’. Traditional mortgages don’t need much thought from the people giving the all clear from the loans. Reverse mortgages do.
Does this mean they should be banned? No, properly diversified banks can easily afford the risk. Is this a boon for banks? We have a saying in finance; ‘Beware the high risk, low yield proposal’. Banks could make money off this, just like I could easily make money trying to hit and run a casino using the martingale system. It doesn’t mean it’s a good practice.
