More homeowners taking out reverse mortgages at younger age

A report today by the Consumer Financial Protection Bureau shows that 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 financial watchdog also announced plans to collect input from the public on rules to rein in reverse mortgage abuses.

The CFPB report found that 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. Overall, almost 10 percent of all reverse mortgage borrowers are at risk of foreclosure. Non-borrowing spouses are especially vulnerable.

Reverse mortgages enable borrowers 62 or older to obtain income through cash payment or lines of credit via their home equity. The reverse mortgage loan is due when the borrower either 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.

Many people, even those who hope to leave their house to their children, often have no choice but to tap their home equity when facing financial or health crises. Home equity represents about 70 percent of the total assets of middle-income retirees, not counting Social Security and pension benefits.

"Reverse mortgages are very complex and can be easily misunderstood by homeowners looking for a way to tap into their equity," said Norma Garcia, manager of the financial services program at Consumers Union, the advocacy arm of Consumer Reports. "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 CFPB also found that required Department of Housing and Urban Development counseling 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. Consumers Union detailed many of the same concerns in its own report on reverse mortgages.

For more about living off your home equity see our report on Reverse mortgages and their alternatives.

The notice requesting public comment will be published in the Federal Register soon, and the CFPB is currently accepting reverse mortgage complaints at www.consumerfinance.gov, and 1-855-411-CFPB.

Previously:
Reverse mortgage reforms needed to protect seniors

Sources:
Reverse Mortgages Report [CFPB]
CFPB Report Details Concerns About Reverse Mortgages For Seniors [Consumers Union]

—Maggie Shader