US regulator sounds alarm about reverse mortgages

* OCC head warns seniors could fall prey

* Says reverse mortgages bear risks like subprime products

* Says guidelines from regulators in the works

By Karey Wutkowski

WASHINGTON, June 8 (Reuters) - Reverse mortgages could be
the next subprime mortgage product to experience rapid growth
while taking advantage of a vulnerable segment of the
population, top U.S. bank regulator John Dugan said on Monday.

Dugan, who heads the Office of the Comptroller of the
Currency and supervises some of the nation's largest banks, said
regulators are crafting guidelines to ensure that robust
consumer protections are in place for reverse mortgages.

"While reverse mortgages can provide real benefits, they
also have some of the same characteristics as the riskiest types
of subprime mortgages -- and that should set off alarm bells,"
Dugan said in prepared remarks to an American Bankers
Association conference.

Reverse mortgages are complicated loans targeted at
homeowners who are at least 62 years old, and allow older
Americans to live off the equity in their homes as they age.

In a reverse mortgage, the homeowner receives money from the
lender, which does not have to be repaid as long as the borrower
lives in the home.

Fannie Mae, the largest provider of U.S. home mortgage
funding, had about a 90 percent share of the reverse mortgage
market at the end of 2008. Many large banks such as Bank of
America (BAC.N) and Wells Fargo (WFC.N) are big providers of
reverse mortgages.

The great majority of reverse mortgages are insured by the
Federal Housing Administration and pose limited credit risk. But
Dugan said a different class of reverse mortgages --
"proprietary" products -- offer less consumer protections.

Dugan said that as the elderly American population grows,
there could be a significant pickup in demand for proprietary
reverse mortgages, which he said bear significant similarities
to the type of subprime products that helped fuel the housing
boom and bust, resulting in a widespread credit crisis and
recession.

"I believe the critical lesson here is the need to act
early, before problems escalate," Dugan said.

He said regulators need to set more standards for
proprietary reverse mortgages. Regulators also need to be
vigilant about misleading marketing and need to crack down on
any lenders who try to bundle a reverse mortgage with other
financial products, such as an annuity or life insurance
product, Dugan said.

If those actions are not enough, Dugan said "more definitive
regulatory standards may need to be adopted, and the OCC is
prepared to do that."
(Reporting by Karey Wutkowski, editing by Matthew Lewis)