A new government report shows many seniors are taking out reverse mortgages on their homes without fully understanding the ramifications, leading to foreclosures among borrowers and a tangle of problems for heirs after the borrower dies.
“Consumer complaints tell us that the complex terms of reverse mortgages continue to be misunderstood,” said Richard Cordray, director of the Consumer Financial Protection Bureau, which last week released a report highlighting the top complaints the agency received about reverse mortgages over the last three years.
A reverse mortgage is a type of loan that allows homeowners age 62 and older to tap a portion of the equity in their homes. The money typically is paid out in a lump sum or in regular fixed payments, with fees and interest added to the balance each month. Unlike a home equity loan, the money does not have to be repaid until the borrower dies, moves out or sells the home.
The loans can be a life line for house-rich, cash-poor seniors struggling with daily living expenses. Reverse mortgages also have been used to help retirees improve their lifestyles, allowing them to buy the summer home they had always dreamed about, for example.
But problems and confusion are expected to continue as more baby boomers retiring with little or no savings turn to the loans for help getting by.
The Consumer Financial Protection Bureau cited a 2010 Federal Reserve report concluding that in the 55-to-64 age group, 41 percent had no retirement savings. Even among those who had a nest egg, the average balance was only $103,200, the report said.
Many complaints that the protection bureau received showed people were confused about the way reverse mortgages work.
“Many consumers struggle with understanding how quickly their loan balance will go up and their home equity will fall,” the report said. As a result, many borrowers who wanted to refinance their loans were frustrated because there wasn’t enough remaining equity in their homes.
One of the most common types of complaints involved the inability of a borrower’s family members to assume the loan in order to keep the house when the borrower died, according to the report.
Reverse mortgages prohibit loan assumptions because actuarial tables are used to help determine the loan amounts. Adult children may keep the home only by paying off the loan or by paying 95 percent of the current appraised value of the house.
Those rules can present problems for multi-generational households when family members are living in the home at the time of the borrower’s death.
Heirs also complained about what they believed were inflated appraisals that required them to pay more than they expected, the report said.
Another common complaint involved the shock of having to sell a home or face foreclosure when a spouse died because the surviving spouse’s name was not on the reverse mortgage. Some couples were advised to take a reverse mortgage in the older spouse’s name to qualify for a bigger loan.
“Some consumers report that their loan originator falsely assured them they would be able to add the other spouse to the loan at a later date,” the report said.
To help more seniors stay in their homes, the U.S. Department of Housing and Urban Development – which insures most reverse mortgages through its Home Equity Conversion Mortgage program – implemented a new rule allowing surviving spouses who meet certain conditions to remain in the home regardless of their borrowing status.
The rule only applies to reverse mortgages originated through HUD’s program after Aug. 4, 2014.
The financial protection bureau also reported a number of complaints from borrowers who faced foreclosure or who lost their homes because they did not keep up with payments for property taxes and homeowners’ insurance, which under terms of a reverse mortgage must be kept current.
“Some consumers describe unsuccessful attempts to halt foreclosure proceedings by paying overdue taxes in full or through payment plans,” the report said.
In an effort to stem such defaults, lenders making loans under HUD’s program after March 2 will be required to make certain financial assessments of a prospective borrower. Currently, loan qualifications primarily are a borrower’s age and the amount of equity in a home.
The financial protection bureau recommends steps that homeowners with reverse mortgages should take to protect their heirs. The advisory, “Three Steps You Should Take If You Have a Reverse Mortgage,” is available at consumerfinance.gov/blog.
The steps involve verifying who is on the loan, and planning ahead for the non-borrowing spouse and for any family members living in the home.
The advisory also has links to a consumer guide for people considering a reverse mortgage and a question-and-answer tutorial.
Consumers can submit a complaint to the protection bureau at ConsumerFinance.gov, or by calling toll-free 1-855-411-2372.