As the market for reverse mortgages grows, concerns are mounting that more seniors are being misled into signing up for a product that some say may put them at risk for losing their home.
In a new report, “Examining Faulty Foundations in Today’s Reverse Mortgages,” consumer advocates say reverse mortgage defaults are triggering foreclosures.
"Lenders are aggressively marketing reverse mortgages while assuming almost no responsibility for whether the loans are suitable for borrowers," said Prescott Cole, senior attorney for California Advocates for Nursing Home Reform, which released the report along with the Consumers Union and the Council on Aging Silicon Valley.
"Now that reverse mortgages are becoming more widespread, it's time for some common sense oversight to protect consumers and taxpayers."
HUD's Office of the Inspector General found that an increasing number of borrowers had defaulted because they had not paid their taxes or homeowners insurance premiums as required.
As of March 2010, 20,631 reverse mortgage loans were in default. Reverse mortgages are likely to generate an even greater number of foreclosures when borrowers die and their heirs are not able to take possession of the home by paying off the mortgage.
A Consumer Reports investigation found more cause for concern: loan bailouts have soared. The annual sum of reverse mortgages taken over by a federal insurance fund has more than quadrupled in four years, from $81.3 million in 2004 to $381.3 million in 2008.
"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 Consumers Union, the nonprofit 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."
As the baby boomer generation retires, the market for reverse mortgages is growing fast. Reverse mortgages enable borrowers who are 62 or older to obtain income through cash payment or lines of credit by tapping the equity in their home.
In their examination of reverse mortgages, the groups said there is a need for stronger oversight by the CFPB, especially over “misleading marketing claims.”
A review by the Government Accountability Office found that 26 marketers of Home Equity Conversion Mortgages engaged in “questionable sales tactics” and made potentially misleading claims that minimized the risk for borrowers.
The GAO found that required counseling provided by the Department of Housing and Urban Development to borrowers “was sorely lacking.”
Seniors are particularly vulnerable to fraudulent marketing, the groups stress. University of Iowa researchers concluded that 35% to 40% of elders studied had impaired decision-making abilities that made them especially vulnerable to misleading advertising.
Moving forward, 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.
The consumer advocate groups believe there should be prohibitions against cross promotions of other financial products by lenders and brokers should be extended to non-HECM loans.
They also say 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.
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, said Shawna Reeves, program coordinator for the Council on Aging Silicon Valley.
