Reverse Mortgages Can Come With Big Risks & High Costs for Seniors
Advocates Call For Stricter Oversight of Growing Reverse Mortgage Market
SAN FRANCISCO, CA — As the market for reverse mortgages grows, concerns are mounting that an increasing number of seniors are being misled into signing up for a complicated financial product that may squander their equity prematurely or put them at risk for losing their homes. In a new report released today, advocates for consumers and seniors are calling for stricter oversight of the reverse mortgage market and new consumer protections for borrowers.
“Reverse mortgages are a very risky deal for borrowers who don’t understand the complicated terms of the loan and how quickly fees and interest charges can add up,” said Norma Garcia, senior staff attorney for Consumers Union, the nonprofit publisher of Consumer Reports. “Reverse mortgages should only be a last resort for seniors who want to stay in their homes and have no other alternatives to supplement their income.”
Consumers Union released the report along with California Advocates for Nursing Home Reform and the Council on Aging Silicon Valley. The report and accompanying tips for consumers are being issued as the newly authorized Consumer Financial Protection Bureau (CFPB) examines reverse mortgages and considers whether new safeguards are needed to protect borrowers from abusive industry practices. The Federal Reserve Board is also considering a set of proposed regulations on reverse mortgages.
As the baby boomer generation retires, the market for reverse mortgages is growing fast. Reverse mortgages enable borrowers who are 62 or older to obtain income through cash payment or lines of credit by tapping the equity in their home. The reverse mortgage loan becomes due when the borrower dies, leaves the home for 12 consecutive months or more, or fails to maintain the property or pay homeowners insurance or property taxes. Borrowers must pay a loan origination fee, closing costs, and compounding interests on the loan principal, which can be significant.
In their examination of reverse mortgages, the groups documented a number of concerns that underscore the need for stronger oversight by the CFPB, including:
Misleading marketing claims: Borrowers can be duped by misleading marketing claims. A review by the Government Accountability Office (GAO) found that 26 marketers of Home Equity Conversion Mortgages (HECMs) engaged in questionable sales tactics and made potentially misleading claims that minimized the risk for borrowers. The GAO found that required counseling provided by the Department of Housing and Urban Development (HUD) to borrowers was sorely lacking.
Seniors are particularly vulnerable to misleading marketing: Recent research has indicated that seniors are particularly susceptible to fraudulent marketing. University of Iowa researchers concluded that 35-40 percent of elders studied had impaired decision making abilities that made them especially vulnerable to misleading advertising.
Cross promotion of other unsuitable financial products: Seniors are also targeted with aggressive cross promotion of other financial products like long term care insurance or annuities that may not be suitable for them. While lenders and brokers selling HECM loans are prohibited from promoting annuities or insurance, insurance agents can legally direct senior clients to get a reverse mortgage to fund insurance products.
Reverse mortgage defaults are triggering foreclosures: HUD’s Office of the Inspector General found that an increasing number of borrowers had defaulted because they had not paid their taxes or homeowners insurance premiums as required. As of March 2010, 20,631 reverse mortgage loans were in default. Reverse mortgages are likely to generate an even greater number of foreclosures when borrowers die and their heirs are not able to take possession of the home by paying off the mortgage.
Reverse mortgage loan bailouts are on the rise: A Consumer Reports investigation found more cause for concern: loan bailouts have soared. The annual sum of reverse mortgages taken over by a federal insurance fund has more than quadrupled in four years, from $81.3 million in 2004 to $381.3 million in 2008.
“Lenders are aggressively marketing reverse mortgages while assuming almost no responsibility for whether the loans are suitable for borrowers,” said Prescott Cole, senior attorney for California Advocates for Nursing Home Reform. “Now that reverse mortgages are becoming more widespread, it’s time for some common sense oversight to protect consumers and taxpayers.”
The groups recommended a number of reforms, including:
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 information to help borrowers determine whether the loans are suitable for them.
Adopt stronger prohibitions on cross promotions: Prohibitions against cross promotions of other financial products by lenders and brokers should extend to non-HECM loans. Insurance agents and brokers should be held liable for selling an annuity 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 who take out reverse mortgages are at risk of using up all of their equity to cover unexpected costs later in life or even losing their home,” said Shawna Reeves, program coordinator for the Council on Aging Silicon Valley. “The Consumer Financial Protection Bureau should act to rein in reverse mortgage abuses and make sure that seniors get the protections they need.”