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.