Reversals of fortune
The next financial fiasco? It could be reverse mortgages.
Last reviewed: September 2009
Ernest Minor is packing up his Marysville, Calif., home. After his wife, Norma, died in 2007, a reverse mortgage came due—a
whopping bill of more than $200,000. (The home's current value is $130,000.) Now Minor, who says he was misled into thinking
the loan was a good way to pay for Norma's mounting medical bills, is likely to be evicted.
Reverse mortgages can be valuable as a last resort for seniors who want to stay in their homes and have significant equity
but need money to supplement income or banish an existing mortgage payment. With a reverse mortgage, they can trade some of
that equity for a lump sum and monthly payouts.
But those loans can be terrible for customers who don't understand the complicated rules governing them and how quickly high
fees and interest charges can balloon. They can end up stranded in their homes without any remaining equity to cover unexpected
costs later in life.
Use of the loans is exploding as lenders—who shoulder almost no risks—push them to the growing ranks of retired baby boomers,
especially for spending on vacations, new cars, and more.
Lawmakers and regulators are getting worried. "The people who are making these loans and advertising them so heavily to seniors
on cable TV get the rewards but escape the risks that come with them. It's going to be the sequel to the subprime-mortgage
mess," says Sen. Claire McCaskill, D-Mo., who is pushing for reverse-mortgage industry reforms.
- A Consumer Reports investigation has 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,
according to our analysis of more than 500,000 loans over two decades.
- Taxpayers are being tapped to subsidize reverse mortgages for the first time. Usually, insurance premiums paid by borrowers
have covered bailouts of mortgages by the fund. The payouts to lenders occur under certain circumstances, such as when the
eventual sale of a borrower's home doesn't cover the money owed on the loan. Now the Department of Housing and Urban Development
says that $798 million in taxpayer money must be budgeted in the next fiscal year to cover potential losses that won't be
covered by the premiums.
- Marketing can be misleading. Too often sales pitches emphasize the positives and play down the high costs of the loans. At
a March 2009 industry conference in New York City, one speaker delivered advice on the "10 Commandments for Selling to Seniors,"
including beginning the pitch with appeals to emotions rather than reason.
- Unsuspecting borrowers have become cash cows for lenders and others who encourage them to use their mortgage proceeds to buy
financial products such as deferred annuities that can be inappropriate for their situation. And the required counseling for
the mortgages can be far too skimpy.