The federal regulator for consumer financial products is warning that borrowers on reverse mortgages often aren’t aware about how the product works or many of the pitfalls associated with taking out such a loan. The regulator predicts growth in upcoming reverse originations despite a sharp decline in recent government-insured volume and the exit of the biggest players.
Reverse mortgages are complicated products that could wind up being more widely used as more baby boomers reach retirement age, according to a new government report.
But one-in-ten reverse mortgages are in default.
Those findings were outlined in a 231-page Reverse Mortgages Report to Congress released by the Consumer Financial Protection Bureau Thursday. The study was required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The report found that “what is happening in practice is different than what was intended.”
Nearly 10 percent of reverse mortgages are in default as a result of borrowers who haven’t paid taxes and insurance on their properties, according to the CFPB. Some borrowers just don’t understand that they need to continue to pay taxes and insurance.
Part of the problem is that few borrowers completely understand how reverse mortgages work. Many can’t comprehend that their loan balances rise — cutting into their home equity.
The report also found that reverse borrowers are getting younger, with new borrowers most frequently being 62 years old — the earliest age that a borrower can take out a reverse mortgage. But those younger borrowers are left with fewer financial resources to pay for moving, health-related and expenses as they get older. Many are also left without enough cash to pay their taxes and insurance.
Another concern is that 70 percent of borrowers utilize a lump sum payout instead of income streams or lines of credit — exacerbating the lack of resources as they age.
Making things worse is deceptive and misleading marketing, such as government-looking mailers touting reverse mortgages as a government benefit or entitlement program like Medicare.
“It is difficult to tell from these materials that a reverse mortgage is in fact a financial product and not a government benefit,” the CFPB said.
Housing counselors used by reverse mortgage borrowers are struggling to understand the new array of reverse product choices, and they need improved methods to help consumers better understand the complex tradeoffs involved in the decision to get a reverse mortgage.
In a statement from the National Reverse Mortgage Lenders Association, the group’s president and chief executive officer, Peter Bell, said that the CFPB’s report raises valid questions.
“We look forward to a continuing dialogue to collaborate to find answers,” Bell stated.
Richard Cordray, director of the CFPB, cautioned the public about reverse mortgages.
“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,” Cordray said in the report.
But with the exit of several major reverse lenders such as Bank of America, Financial Freedom, MetLife Bank and Wells Fargo — business has been on the decline.
The Federal Housing Administration endorsed 111,924 home-equity conversion mortgages for $31.3 billion in 2009.
As of last year, HECM volume has tumbled to 68,695 endorsements for $16.9 billion.
So far during 2012, HECM endorsements total 19,577 loans for $4.7 billion — putting annual production on track to come in around $14 billion.
The bureau is seeking feedback about the issues outline in the report, and public comments are being taken for 60 days.