Advocates: Now Is The Time To Reform Reverse Mortgages

A large chunk of the U.S. population is heading into what are supposed to be their golden years. But between financial hardship and shortsighted financial planning, many of these people are not able to retire comfortably, if at all. A reverse mortgage that allows homeowners who are at least 62 years old to borrow against the equity of their property may seem like a more appealing alternative to working into one’s 80s, but there are pitfalls involved — some of which can be fixed by a bit of reform.

The Consumer Financial Protection Bureau is currently asking for public comment on the topic of reverse mortgages, and our cohorts at Consumers Union, along with California Advocates for Nursing Home Reform, have written [PDF] to the CFPB to suggest a handful of reforms intended to protect at-risk borrowers.

Among the biggest problems with reverse mortgages is that the equity in the home may not be sufficient to sustain the homeowners through their retirement years. And if the property isn’t maintained to the lender’s liking — or if the homeowners fall behind on property tax payments — the borrowers risk losing their homes to foreclosure. And for all of this, they can also get stuck with sizable loan origination fees, closing costs, and compounding interest.

Here are some troubling findings from the report sent to the CFPB:

Reverse mortgage defaults have risen to a significant level: An estimated 54,000 HUD insured reverse mortgage borrowers — or 9.4 percent of such loans – are in default. The vast majority of defaults are triggered when borrowers are unable to pay their property taxes or keep up with their homeowners insurance.

More borrowers are taking lump sums at earlier ages: Up front lump sum payments now account for 70 percent of new HUD-insured reverse mortgages and the average age of borrowers is 72. Borrowing a lump sum and too soon can result in seniors depleting their home equity prematurely. After exhausting their home equity, many senior borrowers will have no resources to fall back on.

Reverse mortgage marketing can be misleading: Since reverse mortgage proceeds can be used for any purpose, some lenders and others who stand to benefit from them pitch these loans as the ticket to the good life while playing down the potential risks to seniors.

Counseling for borrowers is inadequate: Borrowers who take out a HUD-insured reverse mortgage are required to undergo counseling but by the time the borrowers goes for counseling the decision to take out a reverse mortgage has already been made. Most counseling sessions are done by phone and last just an hour on average even though the counselor is advised by HUD to cover 51 different issues with the potential borrower.

To combat these concerns, the advocacy groups recommended the following reforms:

Ensure loans are suitable for borrowers: Lenders and brokers should be required to consider whether the loans put borrowers at risk of losing their homes, if the borrower understands the complex nature of the contract, and if there are more viable alternatives available to the borrower.

Establish a fiduciary responsibility for the loan: Lenders and brokers must be required to act in the best interests of the borrower and should be held liable for violating this fiduciary duty.

Outlaw deceptive marketing: All reverse mortgages should be required to include a balance of information to help borrowers determine whether the loans are suitable for them. The CFPB should investigate marketing practices by “lead generators” who may be misleading seniors into providing information to sell to loan originators and brokers.

Adopt stronger prohibitions on cross promotions: Prohibitions against cross promotions of other financial products by lenders and brokers should extend to non-HUD-insured loans. Insurance agents and brokers should be held liable for selling an annuity or other financial product or service when it is purchased with reverse mortgage funds.

Strengthen the quality and content of counseling: HUD counselors should be required to hold an in-person session with prospective borrowers to determine whether a reverse mortgage is suitable for the borrower. The counselor should deny a counseling certificate to the borrower if the loan is not in the best interest of the senior.

Protect non-borrowing spouses and tenants: Spouses and tenants whose names are not on the reverse mortgage loan should be notified about their limited rights to remain in the home after the borrower dies or permanently moves out of the home.

“Seniors can be an easy target for unscrupulous reverse mortgage lenders who prey on borrowers who may not fully understand the complex nature of these loans,” said Norma Garcia, senior attorney and manager of Consumer Union’s financial services program. “It’s time to strengthen oversight of the reverse mortgage industry to rein in abuses and protect seniors from losing their most valuable asset – their homes.”

Comments

Edit Your Comment

  1. NeverLetMeDown2 says:

    I’m all for full disclosure, but how is this going to be feasible:

    “Establish a fiduciary responsibility for the loan: Lenders and brokers must be required to act in the best interests of the borrower and should be held liable for violating this fiduciary duty.”

    The lender can’t possibly be regarded as having a fiduciary duty to the borrower, they’re on the opposite sides of a transaction.

    • AcctbyDay says:

      Agreed. I’m not a particularly large supporter of reverse mortgages, but the public in general has to take responsibility somewhere. Companies running scams in these should be shut down no doubt, but we all need to step up to the plate here for personal responsibility.

      Of course there is the article that says our scam detectors go with old age… so hmm…

      Your comment on fiduciary responsibility is spot on.

    • Loias supports harsher punishments against corporations says:

      Sure they can. Similar laws already exist for real estate agents, even though they have a dog in the fight themselves (their commission).

      • NeverLetMeDown2 says:

        But in that case they’re working for one side or the other. The seller’s broker doesn’t have the responsibility to tell the buyer “hey, I think you’re overbidding.”

        • Loias supports harsher punishments against corporations says:

          That example doesn’t really work for the situation.

          Fiduciary responsibility would be, in this case, more like not putting someone into a reverse mortgage that has a high probability of forcing the person to go into forclosure. Similar to giving someone a loan for way more than they can afford to pay on their current income.

          Forcing legal fiduciary responsibility doesn’t prevent these problems in and of itself. What WILL is how much you are punished for violating said responsibility and the fear it will create from violating it.

    • soj4life says:

      Well lenders should only approve the loans if the customer is going to benefit from them and is able to pay them back so they do not lose their house. This is what any lenders should follow for a loan that is using someone’s home as collateral.

  2. humphrmi says:

    They make a good point about surviving spouses; once the borrower dies, the bank owns the house and any surviving spouses are out on the street. These things are really only ideal for single borrowers, and even then it’s pretty iffy with the fees.

  3. Marlin says:

    How about just sell and rent a smaller place. Less maintaince and you have your money now.

    My grandmother sold her place and moved into an apartment due to the fact she knew it was to costly for just her to keep the house.

    • AcctbyDay says:

      What about a relatively small house with no mortgage to speak of and the only costs are minor maintenance followed with property taxes at the senior rate (like 300/year in my area versus 2,500) and homeowners insurance for like 100/mo. You cannot seriously believe that paying 1,000 a month for an apartment is wiser than that? You have utilities in either option. There will be major repairs now and again as with any home, but a paid off home is a really cheap option.

      Property Taxes 300/year
      Homeowners 1200/year
      Utilities are comparable in either situation.

      That means at 1,000 / month for an apartment you could spend 10,500 in home repairs in a given year and still be cheaper than an apartment.

      • Marlin says:

        Problem is you are not taking into account the intrest that could be gained from the sell of the house, home insurance, repairs being done badly or by scam, etc…

        That and if the person is so poor to have to do a RM they probably need money and in your case they still have none to pay for the things you list.

  4. Sorta Kinda Lucky Soul says:

    Not to mention the horribly expensive monthly “service fees.” A friend just took over her elderly mother’s finances and was shocked when she found a $275 monthly charge for “service fees and handling” on her mom’s reverse mortgage statement. This is every month, not just yearly. And no, this isn’t escrow as her taxes and insurance are directly paid.

    When my friend called the company to inquire what these fees were for they could not explain it, other than to repeat “Well she signed the contract”. Can’t remember the lender’s name but it was one you’d recognize. So add another item to the list to look into should you or your loved ones need to look into a reverse mortgage.

    Oh, and the only solution the lender gave was to sell the property and pay off the reverse mortgage as they were unwilling to even consider waiving the service and handling fees.

  5. hymie! says:

    This may not be the place, but with no more Usenet, I’m not sure what the right place is.

    Can somebody explain the difference between “Reverse Mortgage” and “Home Equity Line of Credit which is known advance to be paid off by the borrower’s estate after death” ?

    • Loias supports harsher punishments against corporations says:

      The reverse mortgage the lender actually owes equity in the home. An equity line of credit you are simply taking out a loan and using your home as collateral in case you default. The first gives full or partial ownership on the house regardless; the second on if you don’t pay it back.

    • crispyduck13 says:

      I also don’t understand the difference.

    • MaytagRepairman is stealing socks while fixing your dryer. says:

      I will give it a try.

      A “Home Equity Line of Credit” (HELOC) is like a second mortgage. I usually see it as a line of credit tied to a credit card. Need a new washer and dryer? Charge it with the card tied to your HELOC and it shows up on the balance. The lure is the interest rate is lower than a credit card because it is secured against your home.

      A reverse mortgage is a mortgage where the balance goes up instead of down over the life of the mortgage. You are cashing out the equity you have in the house on a monthly basis until eventually the lender owns the home.

      • Loias supports harsher punishments against corporations says:

        That was a better explanation than my own, I think.

      • MarkFL says:

        OK, then explain to me what the difference is between this and selling your house at a tremendous loss. Other than that you get to live in it, that is.

        Also…what happens if you live longer than expected and outlive the reverse mortgage? Do you get thrown out in the street with no home and no equity?

  6. gellfex says:

    It’s very disturbing that what should be a panacea for allowing seniors to stay in their homes, (especially as taxes where I live skyrocket due to gentrification) has been hijacked by the same banksters that drove the economy off a cliff. Lump sum reverse mortgages must look like candy to people who can’t handle their money like gamblers. Same as the people who took out equity loans in the last decade, the money will vanish without a trace and they’ll still lose their homes. But I’ll bet they’re immensely profitable to the banks.

  7. Vermont2US says:

    This seems so much like a scam that it should be illegal. You see these ads on tv with a celebrity spokesperson, and they offer to send information in the mail…I wonder how thorough those mailings are, and how well they stress the pitfalls. I’m sickened by the thought of seniors being pulled into these things with minimal thought of the potential negative consequences. I had no idea that a surviving spouse would lose the right to stay in the home! Sick. So very, very sick.

  8. PragmaticGuy says:

    OMG—Robert Wagner could be out of a job.