Reverse Mortgage Loan Blog

Now that the subprime mortgage business has crashed, many lenders are reviving their incomes by persuading older homeowners to take out reverse mortgages.

Many retirees report being pleased with their reverse mortgages, but consumer advocates say Congress should be moving more quickly to protect the elderly from unscrupulous lenders who push mortgages that sometimes cost far more than borrowers realize.

Reverse mortgages allow older homeowners to obtain cash by siphoning off some of the equity in their property. The older the homeowner and the greater the home value, the more cash that can be made available either as a lump sum, monthly payout or line of credit.

When reverse-mortgage borrowers die, their heirs must repay the loan, plus interest and fees, typically by selling the property. They keep whatever equity is left.

With the oldest of the nation’s 76 million baby boomers turning 62 in 2008, such loans seem certain to proliferate in coming years.

“When used properly, reverse mortgages can be an effective way for seniors to tap into the equity of their house,” U.S. Sen. Herb Kohl (D-Wis.) said at a December hearing of the Senate’s Special Committee on Aging. “But too often these products are not used effectively, and seniors end up losing their homes.”

Recently, a bill was introduced to prevent abuses of reverse mortgages. “I think we should take a closer look at them,” said U.S. Sen. Chris Dodd (D-Conn.), chairman of the Senate Banking Committee.

State officials also are becoming concerned. This month, Florida Attorney General Bill McCollum warned people considering reverse mortgages that “deceptive practices and allegations of high-pressure sales tactics are being more frequently encountered.”

For the past two decades, the vast majority of reverse mortgages have been offered under the federally insured Home Equity Conversion Mortgages program, which applies to people age 62 or older. But some lenders have begun offering private reverse mortgages for people as young as 60.

An AARP Public Policy Institute study, released in December, found that most people considering reverse mortgages were seeking money to pay off debts, make home improvements, keep up with rising medical costs, cover rising tax and insurance costs, hire more help or just enjoy life more.

Only about one older homeowner in 100 currently has a reverse mortgage, but that’s rising rapidly. In fiscal 2007, the HECM program insured 107,367 loans, an increase of 26.5 percent from the previous year, according to the Federal Housing Administration.

The study by AARP, the nation’s largest organization for older Americans, found that 93 percent of surveyed borrowers felt their reverse mortgages had had a mostly positive effect on their lives, compared with just 3 percent who said the effect was mostly negative.

But the benefits often come at a very high cost. Older Americans are being lured in “through direct mail, celebrity endorsements and free lunch seminars,” Kohl said. “Marketers often gloss over the risks.”

The AARP study found that a typical 74-year-old borrower in a $300,000 home would end up spending $30,000 in total fees over the life of the loan, not including interest charges.

AARP researchers concluded “loan costs are too high,” while consumer understanding was too low.

Bad practices may proliferate simply because the industry is expanding so rapidly. The total number of active lenders shot to 1,674, more than twice the previous year’s figure, according to the National Reverse Mortgage Lenders Association.

But Peter Bell, president of the trade group, said that while a “bad element” may be “tarnishing the reputation” of the industry, the great majority of lenders are offering retirees a good option for getting cash in a responsible way.

At the Senate hearing, lawmakers heard how unscrupulous lenders could take advantage of the unwary. Witness Carol Anthony, whose 80-year-old mother got a reverse mortgage, described how a salesman talked her mother into getting a reverse mortgage to fund a deferred annuity. Annuities typically provide the seller with a high commission, but they may not make payments for years.

“She would have to wait until her 100th birthday to see a cent of her money,” Anthony said. “On the day she signed the loan and insurance documents, close to $165,000 had been effectively lifted from her estate.”

Anthony urged Congress to “substantially reduce loan fees the elderly must pay for the privilege of tapping into the equity of their own homes.”

Bell said the issue of pushing people to get inappropriate annuities is separate from offering reverse mortgages. Most retirees simply get the cash they need for paying bills and are not encouraged to put the money into bad investments, he said.

Following the hearing, U.S. Sen. Claire McCaskill (D-Mo.) introduced the Reverse Mortgage Proceeds Protection Act, which would allow the Department of Housing and Urban Development to use mortgage insurance premiums to pay for independent counseling services for people getting reverse mortgages.

HUD already requires that HECM applicants meet with a counselor from a government-approved housing counseling agency for advice. But under current law, lenders may fund the counseling session, which can create conflicts of interest.

McCaskill’s bill also would require HUD to implement regulations to ensure that seniors are not pressured or misled into purchasing unnecessary or unsuitable financial products, such as annuities, long-term care insurance and life insurance.

“One of the reasons for the unprecedented growth of this market is due to the fact that there is a lot of money to be made,” McCaskill said, and Congress must “make sure that the reverse mortgages don’t become the scandal of the next decade.”

Bell said his group does not oppose the legislation.

FIVE THINGS TO CONSIDER

1. Do you really need a reverse mortgage? If you want some cash to take that dream vacation, a reverse mortgage is an expensive way to pay for it. Taking out a pricey loan to make investments or to purchase insurance products is also not a good idea. Make sure that the needs you want to address are really worth the costs.

2. Do you have less costly options? If you could easily make the monthly repayments on a home equity loan or home equity line-of-credit, these alternatives are less costly than a reverse mortgage. Have you looked into the costs and benefits of selling your home and moving to a less expensive one?

3. Can you afford a reverse mortgage? The younger you are when you take out a reverse mortgage, the longer compound interest will grow, and the more you will owe. On the other hand, due to high upfront costs, these loans can be especially costly if you sell and move just a few years after taking one out.

4. Can you afford to start using up your home equity now? The more you use now, the less you will have later when you may need it more, for example, to pay for emergencies, health care needs or everyday living expenses. Homeowners who wait have “a reasonable expectation of securing a better product at a lower cost in the not-too-distant future,” according to a report by the Fidelity Research Institute.

5. Do you fully understand how these loans work? Before considering one, you need to do your homework carefully and thoroughly. Start with this Web page: www.aarp.org/money/revmort

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