​Report Suggests Reverse Mortgages Are Misunderstood

Author: John LesterBy:
Follow Twitter:
July 2, 2012

A published report by the Consumer Financial Protection Bureau shows that 10 percent of people with reverse mortgages are at risk of foreclosure. In fact, the financial watchdog announced plans to collect input from the public as it considers whether to adopt new rules.

“Reverse mortgages are very complex and can be easily misunderstood by homeowners looking for a way to tap into their equity,” Norma Garcia, manager of Consumers Union’s financial services program, tells the Kansas City Consumer infoZine. “Unfortunately some reverse mortgage lenders engage in deceptive marketing and other unfair practices that can undermine the financial security of homeowners heading into retirement. The CFPB should take action to protect seniors who are vulnerable to scam artists peddling abusive reverse mortgages.”

The concept can be confusing, but they call it “reverse borrowing” because it enables those who are 62 or older to obtain income through cash payment or lines of credit by tapping the equity in their home.

The reverse loan becomes due when 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.

Borrowers must pay a loan origination fee, closing costs, and compounding interests on the loan principal, which can be significant.

According to the CFPB’s report, an increasing number of homeowners are taking out reverse mortgages at a younger age, putting them at risk of using up the funds prematurely. The report notes that nearly half of reverse mortgage borrowers are in their 60s and that 73 percent of all borrowers took all or almost all of their available funds up front at closing in FY 2011. Almost 10 percent of all reverse mortgage borrowers are at risk of foreclosure and non-borrowing spouses are especially vulnerable.

The CFPB found that required counseling for reverse mortgages needs improvement and is not good enough to counter misleading industry advertisements and help borrowers understand whether a reverse mortgage is suitable for them. According to the CFPB, federally required reverse mortgage disclosures are insufficient to ensure consumers are making good decisions.