In late June the Consumer Financial Protection Board, known by the acronym CFPB issued a report that underscored the numerous risks faced by American consumers who find understanding this financial product difficult.
When the report was released, Richard Cordray, the CFPB director commented:
“Reverse mortgages are complex and have the potential to become a much more pervasive product in the coming years as the baby boomer generation enters retirement. With one in ten reverse mortgages already in default, it is important that consumers understand what they are signing up for and that it is the right product for them.”
The purpose of a these unique home loans known as reverse mortgages is to let older homeowners tap the equity they have built in their homes currently with payment of the loan made after they pass on, sell or move from the home. Although there is no monthly payment to the lender for a reverse mortgage, the borrower must continue to pay property taxes and homeowner’s insurance. The report warns that almost ten percent of folks who have a reverse mortgage are at risk of being foreclosed as they have not paid property taxes or insurance premiums.
When first created reverse mortgages were designed to allow older homeowners to turn home equity into either an income stream to supplement their retirement benefits or a line of credit for use in their retirement. The expectation was that most borrowers would use the proceeds from a reverse mortgage to remain in their home until death or the need for skilled care.
The study released in June was required by Dodd-Frank Wall Reform and Consumer Protection Act had some disturbing findings. These were:
Confusion by Borrowers
According to the report by the CFPB the majority of consumers are aware of reverse mortgages but most do not understand what they are. The concept of a rising loan balance coupled with falling home equity over time by virtue of a reverse mortgage is a difficult concept for consumers to comprehend. Moreover, some borrowers were unaware that is was their responsibility to pay taxes and homeowners insurance when they had a reverse mortgage – they believed the lender would take care of these expenses.
Age of Borrowers
The report uncovered that consumers taking out reverse mortgages are doing so at younger age. According to the report, the most common age for a person taking out a new reverse mortgage is 62, the minimum age for a borrower to be eligible for a reverse mortgage. The CFPB warns that these borrowers may have difficulty later in life meeting everyday bills or major expenses.
Lump Sum Payments
The study discovered another disturbing trend – 70 percent of borrowers were taking the full amount available in a lump sum rather than as an income stream or line of credit. Coupled with borrowers being younger and taking the full amount at borrowing there is great concern that there will be less resources available as they age. Money to pay property taxes and homeowners insurance may be scarce and put the borrower at risk of losing their home. It is thought they many borrowers are investing the money from the loan proceeds. The CFPB warns of the risk of consumers earning less on the savings or investments they make than the interest on the reverse mortgage balance.
The report revealed that older consumers may be getting deceptive, misleading and false advertising information concerning reverse mortgages. The report speaks of examples where reverse mortgages have been described as a government benefit program or an entitlement program similar to Medicare. The CFPB explains that the materials often contain misleading graphics that closely resemble government seals masking the fact that a reverse mortgage is not a government program but is a financial product issued by private lenders.
One conclusion of the report is that the vast number of reverse mortgage programs now available complicates the job that a housing counselor does. They must have better ways for aiding consumers in understanding the complicated issues that need to be addressed in deciding if a reverse mortgage is a product they want.
The CFPB is seeking additional information on understanding what factors consumers use in determining when to seek a reverse mortgage, why so many choose lump sum payouts, how to halt deceptive activities and how to improve communications by housing counselors to their clients about reverse mortgages.