Reverse mortgage lenders often mislead retirement-bound home owners into signing for a complicated financial product that could unnecessarily cost them their equity and put their home ownership at risk.
That’s according to a new Consumers Union (CU) study which cites a litany of financial dangers associated with the mortgages of last resort. The study also calls for greater oversight for the reverse mortgage market and recommends new consumer protections for reverse mortgage 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 the non-profit Consumers Union, 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,” she added.
The National Reverse Mortgage Lenders Association (NRMLA) disputes the study and recently released it’s own report which claims most reverse mortgage holders are happy with the product, understand the terms and didn’t feel pressured to sign on the dotted line.
What’s a reverse mortgage?
Reverse mortgages are for borrowers 62 or older. The loans offer cash payments or lines of credit tied to home equity. No payments are due until 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. Under those circumstances, the full balance is due. Borrowers also pay a loan origination fee, closing costs, and compounding interest on the loan principal, which can be significant, CU says.
Most reverse mortgages are Home Equity Conversion Mortgages (HECMs), administered by the U.S. Department of Housing and Urban Development (HUD).
However, government oversight hasn’t prevented problems.
Consumers Union released the report “Examining Faulty Foundations in Today’s Reverse Mortgages” along with California Advocates for Nursing Home Reform and the Council on Aging Silicon Valley, just as the new Consumer Financial Protection Bureau (CFPB) is examining reverse mortgages to consider new safeguards to protect borrowers from abusive industry practices.
The Federal Reserve Board is also considering a set of proposed regulations on reverse mortgages.
The consumer groups’ examination of reverse mortgages documented a number of concerns.
• Misleading marketing claims. A review by the Government Accountability Office (GAO) found that 26 HECMs marketers engaged in questionable sales tactics and made misleading claims. The GAO also found that mandated HUD counseling falls short of fully informing borrowers about the terms and risks of the mortgages.
• Cross promotion of other financial products. Seniors pitched reverse mortgages are also pitched long term health care insurance or annuities. Lenders and brokers selling HECMs can’t promote annuities or insurance, but insurance agents can direct seniors to reverse mortgages to fund insurance products.
“When considering a reverse mortgage it’s smart to consult with an adviser who does not have a vested interest in promoting a particular product,” said Nancy Osborne, chief operating officer of Erate.com, a Santa Clara, CA-based financial information publisher and interest rate tracker.
• Reverse mortgage defaults are triggering foreclosures. HUD’s Office of the Inspector General documented an increasing number of borrowers defaulting on reverse mortgages because they didn’t pay property taxes or homeowners insurance premiums. The loans could also generate more foreclosures if, when borrowers die, heirs can’t take possession of the home by paying off the mortgage.
• Reverse mortgage loan bailouts are up. The annual sum of reverse mortgages taken over by a federal insurance fund has more than quadrupled in four years, from $81.3 million worth in 2004 to $381.3 million in 2008.
NRMLA dismissed the report as a cage rattler.
“I think they’re rattling the cages here without having much concrete to offer or any evidence to back up their allegations that there are widespread problems,” Peter Bell, NRMLA president recently told the Wall Street Journal.
NRMLA’s own study “The Retirement Abyss: America’s Seniors’ Search for Security,” recently found that 74 percent of reverse mortgage borrowers surveyed described their experience as positive and chose a rating of 7, 8, 9, or 10 out of 10 point scale with 10 signifying complete satisfaction.
The survey also revealed that seniors with reverse mortgages fully grasped the financial terms associated with the product, with 75 percent saying they understood the financial terms well or very well.
The study also said 90 percent of all seniors who selected a reverse mortgage as a retirement security solution felt no sales pressure, and the same proportion indicated they were more than adequately informed about the product.
Recommendations for reform
CU and other consumer groups say reforms are nevertheless necessary, including:
• Ensuring loans are suitable for borrowers and won’t put the borrowers at risk of losing their homes.
• Establishing a fiduciary responsibility for the loan, making lenders and brokers liable for violating their fiduciary duty.
• Prohibiting deceptive marketing. The mortgages should come with sufficient information to help borrowers determine if the loans are suitable for them.
• Adopting stronger prohibitions on cross promotions to prevent non-HECM lenders and brokers and insurance agents and brokers from offering or selling an annuity purchased with reverse mortgage funds.
• Strengthening the quality and content of counseling with in-person sessions to determine if a reverse mortgage is suitable for the borrower.
“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 with the Council on Aging Silicon Valley.”
“The CFPB should act to rein in reverse mortgage abuses and make sure that seniors get the protections they need,” Reeves added.
Tomorrow, Part 2: “Reverse Mortgages: Look hard before you leap.”
See other Reverse Mortgage stories.