This has been a much-mooted question ever since the National Consumer Law Center issued a report in 2009 that concluded that there was indeed an eerie connection between these two types of mortgages. It implied that the recent boom in reverse mortgages would surely end in bust and losses, just like the explosion in subprime loans. But how accurate is this assessment?

According to Jack Guttentag, the self-proclaimed Mortgage Professor, the comparison is hardly apt: “In fact, the two programs could hardly be more different, and there is no chance of a similar fiasco. Subprime loans imposed repayment obligations on borrowers, many of whom were woefully unprepared to assume them, and which tended to rise over time….But reverse-mortgage borrowers assume no repayment obligation at all…They cannot default on their mortgage because the obligation to make payments under an HECM is the lender’s, not the borrower’s.” He argues further that bank losses associated with reverse mortgages will be non-existent (compared to the extensive sub-prime losses), because the majority are insured by the FHA.

While these are certainly fair points, the counter-argument is that home price declines erode the system behind reverse mortgages just like with sub-prime mortgages. Of course, the FHA stipulates limits to the maximum loan size that reverse mortgages borrowers are eligible for – a major difference. In this sense, it would be as if subprime borrowers were required to make 40% down-payments, so as to minimize the possibility of default. Furthermore, the insurance premiums that the FHA collects are theoretically supposed to offset any losses incurred from declines in property values. In that sense, the possibility of any kid of crisis, akin to the blowup in subprime, seems unlikely, if not altogether impossible. There will be no widespread defaults, no foreclosures, though perhaps some losses which will be ultimately born by the government (taxpayers).

When this round of reverse mortgages begin to mature (i.e. when the borrowers die), however, a crisis of conscience could arise. This crisis will not be financial in nature, but psychological. While the Mortgage Professor correctly points to a survey that established a high degree of borrower satisfaction with reverse mortgages, this could ebb when reverse mortgages come due. In other words, all is well and good when the money is flowing into borrowers’ hands. When it comes to repaying the mortgage and/or turning over the property, though, many borrowers’ (and their heirs) will probably feel some sense of regret. That’s because the very nature of reverse mortgages is such that they are very expensive, both upfront and over the life of the loan.

When borrower realize that in hindsight, the money they were getting wasn’t free, it could provoke the same accusations currently being leveled against subprime lenders: aggressive marketing tactics, inadequate screening of borrowers, a lowering of lending standards, high fees, etc. A crisis? Perhaps not. A growing controversy? Maybe so.