We support reforms to the financial marketplace to curb bad practices by banks and lenders.
We along with the California Advocates for Nursing Home Reform have urged the CFPB to adopt a number of reforms to protect vulnerable seniors from the potential pitfalls of reverse mortgages. The CFPB is collecting public comment on reverse mortgages as it considers whether to strengthen oversight of the industry.
Reverse mortgages are home loans that enable homeowners who are 62 or older to obtain cash by borrowing against the equity in their home. The reverse mortgage loan becomes due when the borrower dies, moves out of the home, or sells it. These loans can rapidly deplete the home’s equity. Borrowers who fail to maintain the property or pay homeowners insurance or property taxes risk going into default on their loans and losing their homes to foreclosure. Borrowers must pay a loan origination fee, closing costs, and compounding interest on the loan principal, which can be significant.
Reverse mortgages may be appropriate for some low-income, healthy seniors who lack other retirement assets, do not qualify for lower cost alternatives, and cannot meet their current mortgage obligation. However, reverse mortgages should be considered as a last resort. In our comments to the CFPB, we highlighted a number of concerns about reverse mortgages, including:
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.
We recommended a number of reforms to protect seniors, 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 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.
I am in the reverse mortgage business and I agree with many of the items mentioned in this article. There are some things associated with the reverse mortgage that could be done better as with any type of loan. The one request I take issue with is regarding reverse mortgage counseling. Many of my customers like doing their counseling session over the phone, in fact some of my clients do not drive or are not able to leave their home often so doing the session over the phone is the only way for them to do it. Also the part about the counselor denying the counseling certificate if they feel like the reverse mortgage is not for them is wrong. Who gives the counselor the authority to make that decision. The counseling is just done to make sure the potential borrower has been informed of all that comes with having a reverse mortgage. Refinancing to a reverse mortgage can be a great benefit to many seniors and if you shop around you can find a great rate and no origination fee, so the costs associated with it are lower than ever.
Thank you CU for this enlightening essay. At age 75 I was about to investigate the possibility of securing a reverse mortgage. Good old and reliable Alex Trebek is schilling reverse mortgages on the TV daily; and who wouldn’t believe good old Alex? I guess if you pay him enough, he will sell anything.
Reverse mortgage defaults have risen to a significant level: The vast majority of defaults are triggered when borrowers are unable to pay their property taxes or keep up with their homeowners insurance.
How is your statement above “a concern about reverse mortgages?”
The reverse mortgage didn’t cause the default. It actually delayed it. If the homeowner couldn’t afford to keep up with their taxes or insurance, they certainly would not have been able to survive without either the income that the reverse mortgage gave them or the freedom from mortgage payments that the reverse mortgage accomplished.
Celebrity spokespersons, like Pat Boone, Fred Thompson and Henry Winkler, paid or not, ought to be required to say at least one time during commercials that the financial product they’re touting involves substantial risk.
I saw a couple of ads on TV for reverse mortgages with well-known celebriies doing the pitches. But I had never heard of the companies that were nmaking the offers. Then one day I saw a similar ad but with no celebrities in it–just straightforward announcing by, IIRC, an offscreen announcer with corresponding graphic. But the company making the offer was Met Life! I have done business with Met Life over many years in other areas, always with positive results. So I called the 800 number, was contacted by the nearest agent, and went through the process. I had need of some of the equity money, and this was the best way to get it, especially since I have no immediate family depending on inheriting the house from me. I am trying to behave responsibly in this matter by leaving the remaining amount in the account. My intent is to use a little of it as needed, but to not let it get below a certain figure. I am leaving that figure there in order that it would be available to me in the event of some unforeseen emergency. Certainly I would agree with your call for stronger oversight and rules regarding reverse mortgages, although I believe that, in my own case, I am safe as long as I remain vigilant. I think that I exercised good judgement with this action, and I hope that CU agrees, based upon my description of the event here. If you people at CU have any response, including questions, I would be happy to receive an e-mail at the above address from you regarding any aspect of this letter. Your feedback would be greatly appreciated! Thank you very much! (I am a longtime subscriber to Consumer Reports.)
they should be tested for Alzheimers and Dimentia.
If they do get a reverse mortgage, it could be voided
if they are diagnosed less than 2 years later.