(1/3/2011) Part 1 of 2: 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 of 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.
The Federal Reserve Board is also considering a set of
proposed regulations on reverse mortgages.
Concerns documented
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 advisor
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.
Industry rebuttal
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.
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 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"
