Surprise! Reverse Mortgages Are Very Confusing

A three-year examination of reverse mortgage complaints to the Consumer Financial Protection Bureau shows that borrowers often didn’t understand the terms of those loans, including how quickly thPiggy bank with trail of pennies leading to a houseeir loan balances would go up and their home equity would fall, the bureau said in a new report.

Reverse mortgages allow homeowners age 62 and older to tap into the equity in their homes. They’re different from home equity credit lines or home equity loans because a reverse mortgage generally is paid back only when the homeowner sells, permanently moves or dies. There are no income or credit qualifications with a reverse mortgage, though this is due to change next month (more on that later). Homeowners are still responsible for property tax payments, insurance and maintenance.

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In its report, the CFPB said some homeowners with the loans found themselves in trouble because they couldn’t afford to pay the taxes and insurance. Some borrowers also said they couldn’t stop their lender from foreclosing on their homes, even by paying overdue taxes in full or through payment plans. Others insisted that their loan servicers incorrectly calculated that their taxes were past due.

The CFPB also received complaints about questionable practices by loan servicers. For example, generally, when a borrower with a reverse mortgage dies, heirs can sell the home, repay the loan balance and pocket any difference, or pay 95 percent of the property’s current appraised value to keep the home. However, some heirs reported that loan servicers had inflated the home’s value, in some cases using improperly performed appraisals, so that heirs would have to pay more after the borrower had died, the report said.

Then there were consumers who said they’d been snookered by salespeople peddling reverse mortgages who gave false information, the agency reported.

The bureau recorded 1,200 complaints about reverse mortgages between December 2011 and December 2014. Some of those complaints may be referred to the CFPB’s Enforcement Division for further review, the agency said.

Stacy Canan, deputy assistant director for the CFPB’s Office for Older Americans, told AARP that consumers are taking reverse mortgages out at younger ages, perhaps because they have debt or haven’t saved enough for retirement. Consequently, she said, they run the risk of spending all their equity by the time they reach their 80s and are likely to have increased health care expenses.

Because of the high fees and complex nature of these loans — and because as many as 10 percent of borrowers faced foreclosure for failing to pay their taxes and insurance, according to a previous CFPB report — lending requirements are about to become more stringent. As of March 2, prospective borrowers will have to undergo detailed financial assessments in an effort to make sure they can afford these loans, also called Home Equity Conversion Mortgages.

The CFPB, citing industry reports, said there were about 628,000 outstanding reverse mortgages.

To learn more about reverse mortgages, go to Ask CFPB for questions and answers about these loans or to read its consumer guide.

Photo: Debbi Smirnoff/iStock

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2Papa 5pts

A lot of these arrangements are scams.  Be extremely careful!  Get a lawyer.......oh wait, they might be crooked too!

dc937 5pts

I can see why some people are upset and feel that they've diminished what they will pass on to their children through these.  However, in our case, we have no children, so anything left in our estate after we pass will be split among our siblings and/or their children.  Depending on what's left, it may be a nice surprise for them, but is not something anyone is planning on or depending upon.  I fully intend to make use of a reverse mortgage when the time comes.  I expect it to provide additional cash to help cushion those retirement years for us.  The only ones I have any needs to provide for are myself and my wife, so anything that helps with that is a plus in my eyes.

OldFroggy 5pts

I agree with StuKin that they are a scam.  If you stop to look at it, it is a way to borrow from the future, without having to pay it back, unless you sell it before you die.  Why would I want to saddle my kids and/or my grandchildren with this kind of debt.  Also, because I don't trust banks to do the right thing, I could end up losing my home because of this.  I will keep paying on my mortgage, and when I die, the house will be sold with proceeds divided up fairly.

StuKin 5pts

Reverse mortgages are one of the biggest scams ever foisted on the American public.  It's a way for unscrupulous con artists to steal seniors' homes and put them out in the cold.  The whole idea of burdening seniors with debt when they can least afford it is totally repulsive.