Last week, Arizona became the second state (after California) to pass legislation governing reverse mortgages. The legislation is a hot topic of discussion on the blogosphere, but upon closer examination, it can hardly be considered news.

According to its drafters, the legislation was designed to protect borrowers that aren’t covered by federal regulation: A ” ‘significant segment‘ of the reverse-mortgage market is not subject to federal regulations, said Assistant Attorney General Jennifer Boucek…Rep. Bill Konopnicki, R-Safford, who sponsored the Arizona legislation, said it fills a gap in the law.” To be fair, proprietary reverse mortgages should be regulated, but given that they represent such a minuscule portion of total reverse mortgage lending (the majority of borrowers opt for a federally-insured HECM reverse mortgage), this legislation is tantamount in scope to a law regulating people that have alligators as pets.

If you examine the content of the legislation, it is basically a carbon copy of the regulations which already govern the federal Home Equity Conversion Mortgage (HECM). The first provision of the law “Mandates that adequate financial counseling be provided by a counselor who is an independent third party.” It describes in detail what is meant by “independent third party,” and how the borrower and originator can satisfy this requirement, in a manner consistent with federal guidelines.

The second and third provisions outline the structure of any reverse mortgage, though again, there is almost complete harmony with the federal program. Along the same lines, it bans the cross-selling of other financial products, and lists the disclosure which must be provided to borrowers, such as to promote full transparency. The next provision dictates that a borrower cannot be held liable if the balance of the reverse mortgage exceeds the value of the home. The final provision explains how the bill will be enforced and how violators will be punished.

As you can see, there is nothing groundbreaking or worth getting excited about. Basically, the goal of the law seems to be to regulate proprietary reverse mortgage out of existence in Arizona, since no rational lender would originate one that is identical to the federal HECM reverse mortgage, only without the insurance. Remember that the insurance protects the lender, and the only way for a lender to protect itself absent of insurance would be to charge a very high interest rate and/or to hold the borrower liable if the price of their home declines. The latter is now illegal, and the former would be self-defeating.

So, there you have it: your Tax Dollars at work. If more states follow suit, it looks the only reverse mortgage programs that will be available to borrowers (for better or worse) will be those that are administered by the government.

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