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Understanding reverse mortgages

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Today, we released a Report to Congress on reverse mortgages. http://files.consumerfinance.gov/a/assets/documents/201206_cfpb_Reverse_Mortgage_Report.pdf

The Dodd-Frank Act, which created the CFPB, specifically recognized the unique financial needs of older Americans. Our Office of Older Americans is dedicated to protecting this population. In that effort we have taken a special look at one financial product only sold to them: reverse mortgages. Today’s report presents the findings of that study.

A reverse mortgage is a special type of home loan that allows older homeowners to access the equity they have built up in their homes now, and defer payment of the loan until they pass away, sell, or move out of the home. Reverse mortgages require no monthly mortgage payments, but borrowers are still responsible for property taxes and homeowner’s insurance.

Our study finds that reverse mortgages are complex products that are difficult for consumers to understand. Borrowers are also increasingly using reverse mortgages in ways that are different from what was intended. Nearly half of recent borrowers were in their 60s, and nearly 3 out of 4 borrowers took all of their money upfront in a lump sum. The Bureau is concerned that these borrowers will have fewer resources to pay for everyday and major expenses later in life.

Deceptive marketing is a long-standing problem in this market, with many older Americans receiving solicitations implying that a reverse mortgage is a government benefit rather than a loan. Prospective borrowers are required to attend counseling, but these deceptive advertisements and an increased array of product options make the counselor’s job very difficult.

We have submitted a Notice and Request for Information to gather public input on follow-up questions about reverse mortgages. We are seeking feedback on the factors most important to consumers when they are considering a reverse mortgage, the way consumers use reverse mortgage proceeds, the longer-term outcomes of reverse mortgage borrowers, and certain practices that may differ depending on the type of business that is offering the reverse mortgage . Sign up for our email list and we’ll notify you when the comment period opens. You can view the Request for Information here

Additionally, our Office of Older Americans released a 4-page consumer guide to reverse mortgages and a new and improved set of answers to common reverse mortgages questions on Ask CFPB. We’re also taking complaints on reverse mortgages through our complaint system.

  • Pbilal

    I’ve been a certified HECM counselor for over 5 years and wanted to comment on a few of the Bureau’s concerns based on my experience with homeowners.
    Lack of Understanding – I would agree that the general public has very little knowledge on how this product works and future implications etc.  which is why counseling is required.  The counseling protocol is quite comprehensive and homeowners are encouraged to call at any time during/after the application process – I’ve answered questions from clients years after the actual session.  Over the years I’ve found that homeowners are more knowledgeable – lenders are doing a better job preparing and educating their clients.  Through the Nat. Council on Aging – I’ve worked with homeowners who are in danger of losing their homes primarily because they haven’t paid property taxes.  Usually this wasn’t because they didn’t understand it – they just didn’t have the money.  Circumstances can change overnight if your spouse dies and income is suddenly cut in half.
    Younger Borrowers – Many older workers have lost jobs and find it nearly impossible to get hired (full time) if you are over 60.  Often homeowners use RM as a means to avoid foreclosure.  Moving is not always an option.  If credit is poor or income is low – they will never be able to qualify to buy another home or possibly even have trouble renting.  Home values have gone down – many just hope that there is enough equity to get out from under the current mortgage.  This also explains why some choose lump sum over line of credit or tenure payments.  Some situations are so dire – homeowners are not looking that far into the future even though we do our best to get the homeowner to consider long term goals and challenges.  Many younger borrowers view a RM as a retirement tool – this is no longer the product that ‘will help you pay for in-home services as you age in place’.
    Reverse mortgages are certainly not for everyone – for others it’s a life-saver.  Part of our job as counselors is to help homeowners consider all options and take advantage of other financial benefits such as:  property tax credits/Medicare savings/energy assistance, etc. 

  • Mike

    These are deceptive loans. These people end up loosing their houses to the borrower because this is a loan they will never pay back. This comes down to an education issue on saving for retirement and the lack of traditional pensions by profit greedy employers that force them to these legal loan sharks. Reverse mortgages need to be outlawed.

  • http://twitter.com/LynxCarHire Lynx Car Hire

    I’m not sure that reverse mortgages need to be outlawed as one poster has said, but I do think that more emphasis needs to be made on communicating to the public exactly what they are and what the risks are.

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