There are a number of reasons someone might take out a reverse mortgage: to pay for prescriptions or medial care, to subsidize their daily living expenses or even to settle their fear of becoming a burden to their family. But the product that was designed to keep elderly consumers in their homes is now wreaking havoc on their surviving loved ones.

Children and surviving spouses of reverse mortgage borrowers are finding that the loans are threatening their own livelihood and that lenders aren’t being upfront about their options to resolve the debt, The New York Times reports.

Reverse mortgages allow a borrower, 62 years or older, to convert the equity on their home into a lump sum or monthly payments. The funds are not required to be paid back until the borrower moves or dies

Although the reverse mortgage industry has been in decline since the financial crisis — only 51,000 loans were taken out in 2012, far below the 115,000 loans taken out in 2007 — the default rate is on the rise and surviving family members are left with the bill.

And that’s just the situation that Isabel, whose story is told in the Times piece, found herself in when her mother passed away. Now, she has a stack of foreclosure notices for her parent’s home because she was never told her options in resolving the debt.

Her mother began borrowing against the equity of her home in 2009. When she died two years later the outstanding reverse mortgage balance hovered around $308,000. The company that extended the loan moved to foreclose on the house unless Isabel paid the debt in full.

However, Department of Housing and Urban Development regulations for reverse mortgages require banks offer survivors the option to settle the loan for 95% of the home’s current fair market value. Because reverse mortgage loans are tied to the equity in one’s home, it is a finite amount, which can fluctuate with the changing home value.

Additionally, lenders must offer survivors up to 30 days from when the loan becomes due to decide what to do with the property, and up to six months to arrange financing

Isabel says she was never given that option.

The Times contacted the lender and it agreed to offer Isabel the option to settle for 95% of the homes’ current value, however, that value is much higher than it was two years ago when her mother died.

While it might just be the lenders trying to squeeze more money from survivors, the issue also illustrates that regulators aren’t holding lenders accountable or protecting consumers.

A similar issue resulted in HUD being sued in February by four surviving spouses of reverse mortgage borrowers.

The class-action lawsuit alleges that the agency failed to protect the plaintiffs from displacement and foreclosure as required by federal law, the Washington Post reported.

The suit highlights a federal court’s ruling last year that HUD regulations, which allow banks to foreclose on surviving spouses or force them to pay off the debt, are a contradiction to a federal statute designed to help them.

In 2012, our cohorts at Consumers Union called upon the Consumer Financial Protection Bureau to enact stricter oversight on the market. At the time CFPB had asked for public comment on the issue of reverse mortgages.

Consumers Union, along with California Advocates for Nursing Home Reform, wrote [PDF] to the CFPB to suggest a handful of reforms intended to protect at-risk borrowers, including a suggestion regarding surviving spouses and children.

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.

“Reverse mortgages should only be used as a last resort because they can carry huge costs that can quickly drain a homeowners equity,” Norma Garcia, senior attorney and manager of Consumers Union’s financial services program, said at the time. “The reverse mortgage industry insists that it can police itself but it’s clear we need common sense oversight by the CFPB to protect seniors.”

In a 2012 report [PDF] to Congress on reverse mortgages, CFPB concluded that stricter underwriting and counseling sessions would help ensure that borrowers were prepared for the obligations associated with reverse mortgages. However, there were no suggestions to protect surviving spouses and children.

Criticism and issues regarding reverse mortgages go far deeper than just their effects on surviving family members. Consumer advocates have voiced their concerns with the market’s misleading marketing and a lack of fiduciary responsibility on the part of lenders. Advocates suggest elderly consumers explore all other available options before signing on for a reverse mortgage.

Today, tens of thousands of consumers are facing foreclosure because of their parents’ or spouses’ decision to take out a reverse mortgage. And the number only looks to grow. The Federal Reserve estimates the combined debt of consumers ages 65 to 74 is rising faster than any other group.

Pitfalls of Reverse Mortgages May Pass to Borrower’s Heirs [The New York Times]

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