Much is being made of a report just released by National Consumer Law Center (NCLC), entitle “Subprime Revisited: How the Rise of the Reverse Mortgage Lending Industry Puts Older Homeowners at Risk.” Analysts and industry-watchers have homed in specifically on the explicit comparison between reverse mortgages and subprime mortgages.

While the mechanics of the two mortgage products are quite different, there is a tremendous overlap in their essence, and hence the way in which they are being promoted. For example, both subprime mortgages and reverse mortgages are designed to appeal to a class of potential borrowers whose respective financial situations are especially precarious. For many of these borrowers, they are in desperate need of financing, and simply have nowhere else to turn.

Perhaps the most poignant similarity is the way in which the two mortgage products are being marketed. TV commercials are pitching reverse mortgages as some kind of government entitlement program, the proceeds of which can be used to pay for anything, from a sailboat to medical bills. Argues the NCLC, in its report:

Many of the same players that fueled the subprime mortgage boom — ultimately with disastrous consequences—have turned their attention to the reverse market. Lenders, including some of the nation’s largest banks, view that market as a source of profits that have dried up elsewhere. Mortgage brokers see it as a new source of rich fees. Predators who once reaped profits from exotic loans have now focused on wresting more wealth from vulnerable seniors. And securitization, which allowed subprime loan originators to disassociate themselves from the downside risks of abusive lending, is becoming commonplace in the reverse mortgage industry.

In addition, the same perverse incentives (i.e. lack of consequences) that characterized subprime origination is also present in the origination of reverse mortgages. The main difference is that the “victims” in the subprime crisis were the investors foolish enough to underwrite the mortgages. (Of course, some borrowers suffered as well, but many were no worse off than before taking out a subprime mortgage).

Reverse mortgages, in contrast, can potentially victimize the borrower directly, and American taxpayers indirectly. While defenders of reverse mortgages rightfully tout their benefits, the truth is that the product doesn’t make financial sense for the average borrower, since it trades cash for equity at an unfair exchange rate. Certainly, many retirees are grateful to receive seemingly “free” cash while still retaining the right to residency, but many others are shocked when 15 years later, most of the equity in their home has already been depleted. At which point, they basically become hostages (in the words of one columnist) in their home, since moving out would leave them with little proceeds and with no place to live.

The government, meanwhile, bears ultimate responsibility, due to the insurance that it underwrites on 90% of reverse mortgages. The FHA – the agency which manages this process – has seen its reserves fall to the lowest level in 75 years, and analysts are now talking about a bailout in the same manner as Fannie Mae and Freddie Mac, which we all know lost billions guaranteeing subprime and other junk mortgages.

In short, while the analogy isn’t perfect, it’s still apt. Summarized U.S. Senator Claire McCaskill, who is leading the calls for reform, has pointed that 10,000 new borrowers become eligible for reverse mortgages every day (by virtue of reaching the required age of 62), and that as much as $4 Trillion in untapped equity remains “trapped” in their homes. “We’ve seen this movie before, and it didn’t have a pretty ending. Abuses in the subprime lending market almost brought down our economy. Now we’re seeing similar abuses with reverse mortgage lending. Something needs to be done before more life savings are depleted and more tax dollars are drained.”