More Americans are getting reverse mortgages — and that's not a good thing, according the government's consumer finance watchdog.
The Consumer Financial Protection Bureau said in a report released Thursday that reverse mortgages are not being used as Congress intended. It also warned that the program could cost some seniors extra cash or even their homes.
Reverse mortgages sound fairly simple: They allow for homeowners 62 and older to borrow against the equity they’ve built up in their home without selling it. But the CFPB calls these loans “inherently complicated products” that are not easy for the average consumer to understand.
Based on its study of the marketplace, the CFPB concludes that people who consider taking out these loans are “ill-equipped” to understand the costs and risks involved.
“People are quite confused about reverse mortgages,” said Hubert Humphrey III,who heads the CFPB’s Office of Older Americans. “People need to better understand reverse mortgages. What is the best way to use them? What are the risks and what are the costs associated with it?”
It’s called a “reverse” mortgage because rather than pay the lender, the lender pays you. You don’t have to pay back the loan as long as you live in the house, maintain it and pay the insurance and property taxes. The loan must be paid off in full if you move or when you die. That usually means selling the house.
Here’s the part that sometimes gets missed: A reverse mortgage is still a loan – with monthly interest charges, fees and other costs. The borrower does not make interest payments. They are simply added to the loan balance.
Over time, the home equity decreases while the loan balance increases. If the value of that loan exceeds the value of the home, the borrower (or his/her estate) will not receive any money when the house is sold.
Right now, only 2 to 3 percent of the eligible homeowners have a reverse mortgage. But the CFPB predicts these loans could become much more common in the coming decades as baby boomers retire.
Since the 1990s, the proportion of borrowers in their 60s has more than doubled to 47 percent.
Congress directed the CFPB to study the reverse mortgage market as part of the 2010 Dodd-Frank financial oversight law that also established the still-controversial watchdog agency. The study could eventually lead to new federal regulations for the reverse mortgage market.
Drastic changes in the marketplace
The CFPB report points out that the reverse mortgage market has changed dramatically in the last three years. These loans were designed as a way for seniors to get some cash out of their homes to meet retirement expenses. Today, the type of loans offered and the way they are structured are quite different.
Before 2009, most reverse mortgages were adjustable-rate loans. The borrower could choose monthly payments for everyday expenses, a line of credit for major expenses (home repair or medical bills) or a combination of the two.
Now the majority of these loans (70 percent) are fixed-rate, with a lump-sum payment.
“You take out that loan and get all of the money instantly,” Humphrey said. “And yet you have all of your life left to live and you may not have the resources you need when you really need it.”
Other troubling findings
- A large proportion of reverse mortgage borrowers (nearly 10 percent) are at risk of foreclosure because they are not paying taxes and insurance. The CFPB says the percentage is increasing.
- Those taking out reverse mortgages are younger than in the past. About half the borrowers are under the age of 70. As the report notes, “Taking out a reverse mortgage early in retirement, or even before reaching retirement, increases risks to consumers.” By tapping the home equity early, these homeowners could find themselves without the money needed to make a move in the future.
- The study found that “misleading advertising” remains a problem in the industry and “increases risks to consumers.” The report says these ads contribute to people’s misconceptions about the loans which increases the likelihood of poor decision-making.
- Many people who receive counseling when applying for a home equity loan do not understand the risks. The report says counselors need to do a better job and borrowers need to take the counseling sessions more seriously. The report also says counseling may not be sufficient to “counter the effects of misleading advertising, aggressive sales tactics, or questionable business practices.
The study concludes that stronger regulation and supervision of reverse mortgage companies as well as enforcement of existing laws may also be necessary. It notes that existing disclosures are “quite difficult” for people to understand. And it points out that there are no specific federal rules prohibiting deceptive advertising of reverse mortgages.
The Consumer Financial Protection Bureau is asking for public commentsbefore deciding what, if anything, needs to be done. CFPB is accepting reverse mortgage complaintsonline or through the mail.
This week, Consumers Union (the advocacy arm of Consumer Reports) called for stricter federal oversight of the reverse mortgage market.
Want more information? The CFPB has questions and answers about reverse mortgages on its ASK CFPB database. There’s also a fact sheet and consumer guide with key facts on these loans.
“There may be situations where a reverse mortgage is the appropriate route to take,” Hubert Humphrey III said, “but there are many things that need to be considered before you get to that stage.”
The Associated Press and Reuters contributed to this report.
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