CFPB Issues Advisory Offering Tips to Borrowers on Protecting Family Members
WASHINGTON, D.C. – Today the Consumer Financial Protection Bureau (CFPB) released a report highlighting the top complaints for reverse mortgages. According to the report, consumers are frustrated with their loan terms, servicer runarounds, and foreclosure problems. To help consumers who already have a reverse mortgage, the CFPB is issuing an advisory with tips on how to plan ahead to protect loved ones from financial hardship brought on by a reverse mortgage.
“Consumer complaints tell us that the complex terms of reverse mortgages continue to be misunderstood,” said CFPB Director Richard Cordray. “As more baby boomers choose reverse mortgages to tap into their home equity, they need to understand the unique terms and features of this product. Our advisory can help those who have already chosen reverse mortgages to plan ahead for loved ones.”
The report can be found at: https://www.consumerfinance.gov/reports/snapshot-of-reverse-mortgage-complaints-december-2011-2014/
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 and defer payment of the loan until they pass away, sell, or move out. The loan proceeds are generally provided to the borrowers as lump-sum payments, monthly payments, or as lines of credit. The reverse mortgage market is about 1 percent of the size of the traditional mortgage market, with 628,000 outstanding loans, according to industry reports. Most reverse mortgages today are federally insured through the Federal Housing Administration’s (FHA) Home Equity Conversion Mortgage (HECM) program, which means they must comply with the related regulations.
The number of reverse mortgage originations is likely to increase in upcoming years with the retirement of the “baby boom” generation, which has more home equity than retirement savings. Studies have estimated that among Americans 55 to 64 years old, 41 percent have no retirement savings account. But a majority of them, about 74 percent, own their homes and have built up good equity. The most common ways for consumers to access this home equity is to refinance their original mortgage, take out a home equity loan or line of credit, sell the home and downsize, or obtain a reverse mortgage.
The CFPB report covers 1,200 reverse mortgage complaints received at the Bureau between when the Bureau started taking complaints, on December 1, 2011, and December 31, 2014. Reverse mortgage complaints comprised about 1 percent of all mortgage complaints, by all ages, during this timeframe. And while reverse mortgages are only available to people over the age of 62, only about 42 percent of the complaints were from consumers who described themselves as 62 or older. The remaining consumers likely included the younger spouses or family members of borrowers.
Many complaints show a mismatch between consumer expectations and the way the product functions. Many consumers, for example, struggle with understanding how quickly their loan balance will go up and their home equity will fall. The top complaints about reverse mortgages included:
- Distress about the inability to add new borrowers to an existing loan: Reverse mortgages prohibit spouses, heirs, and dependents from taking over the loan. This is because loan amounts are, in part, calculated using a borrower’s age and the loan repayment is triggered when the last borrower moves out or dies. This can be a problem for surviving spouses and children. Family members complained to the CFPB about not being able to be added to the loan so they could keep the home.
- Frustration with runarounds when trying to pay off the debt: When the borrower dies, heirs can sell the home, repay the loan balance, or pay 95 percent of the property’s assessed value. Consumers complained that loan servicers do not provide a clear process to allow them to settle the debt. Consumers also complained about appraisal delays, improperly performed appraisals, and inflated home values so they would have to pay more. Others complained about a lack of response from loan servicers, including unanswered calls, and a lack of response to written requests.
- Struggles with foreclosure due to issues with property taxes and homeowners’ insurance: Reverse mortgages require no monthly mortgage payments but borrowers are still responsible for property taxes and homeowner’s insurance. A previous CFPB report found that nearly 10 percent of reverse mortgage borrowers are at risk of foreclosure because they have failed to pay these expenses. Consumers who complained to the CFPB described unsuccessful attempts to halt foreclosure proceedings by paying overdue taxes. Others insisted that their loan servicers had determined incorrectly that their taxes were overdue. Sometimes these inaccuracies were due to a failure by loan servicers to keep accurate records.
Protecting Loved Ones From Financial Hardship
Because many consumers do not understand the long-term financial impact of reverse mortgages, today the CFPB is issuing an advisory to help reverse mortgage borrowers. The advisory highlights three ways consumers who are the borrowers on the loan can help plan so that their surviving heirs are not harmed:
- Verify who is on the loan: If two borrowers took out the reverse mortgage, they should check with the reverse mortgage company to make sure its loan records are accurate.
- Plan ahead for the non-borrowing spouse: For consumers who took out a HECM reverse mortgage in the name of only one spouse before August 4, 2014, they should contact their loan servicer to find out if the non-borrowing spouse may qualify for a repayment deferral. If not, they should make a plan in the event the borrowing spouse passes away first. Couples with enough remaining equity could consider taking out a new reverse mortgage, but they will incur new loan fees. Some surviving spouses may also be able to pay off the reverse mortgage, or take out a traditional mortgage, perhaps with another family member. Many will need to plan for where they will live after the home is sold to repay the loan. If the loan was originated after August 4, 2014, new changes to the HECM program will allow the non-borrowing spouse, meeting certain conditions, to remain in the home.
- Plan ahead for other family members living in the home: Consumers should make sure any children or other family members living in the home know what to expect when the reverse mortgage is due. If those members want to keep the home, the borrower should contact their reverse mortgage company to have them explain their options. They can also contact a HUD-approved housing counselor to explore their options:
The CFPB’s advisory can be found at: https://www.consumerfinance.gov/blog/consumer-advisory-three-steps-you-should-take-if-you-have-a-reverse-mortgage/
The Bureau has questions and answers about reverse mortgages at Ask CFPB. The Bureau also has developed a consumer guide for older Americans with key facts on reverse mortgages. Consumers can submit a complaint with the CFPB about reverse mortgages through the web at consumerfinance.gov, by phone at 1-855-411-CFPB or TTY/TDD (855) 729- 2372, or by mail.
More information for older Americans and their caregivers about making financial decisions, protecting assets, preventing financial exploitation, and planning for long-term financial security can be found at: https://www.consumerfinance.gov/older-americans/
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.