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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 th

Piggy bank with trail of pennies leading to a house

eir 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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