Advertisements touting reverse mortgages often leave older consumers confused about the loan terms and unaware of the risks, according to a new report from the Consumer Financial Protection Bureau.
“Perhaps most concerning of all, the ads left the consumers believing that if they purchase a reverse mortgage loan, they will be able to rest assured that they can live in their homes and enjoy financial security for the rest of their lives,” CFPB Director Richard Cordray said in a teleconference. “But a reverse mortgage does not carry such guarantees.”
Reverse mortgages allow consumers 62 and older to borrow against the home equity in their house. It’s a loan and, like others, carries an interest rate, so the amount owed grows over time. Though borrowers don’t make monthly payments, they must repay the loan when they sell the house, move or die.
The CFPB’s report was based on focus groups with 59 older consumers in three cities. Virtually all recalled seeing reverse mortgage ads — sometimes as many as several a day. Often the ads feature a celebrity spokesperson. As one focus group member commented, “When it’s a former congressman endorsing it, it makes it sound like a good idea.” (Actor and former U.S. senator Fred Thompson is a pitchman for a reverse mortgage company.)
Yet when the CFPB showed the focus groups print, radio, online and television advertisements, the consumers came away with many wrong ideas about reverse mortgages.
Some didn’t realize that these were loans or that they had to be repaid. Consumers didn’t understand that the loans carried fees and compounding interest.
They assumed that a borrower no longer had to pay property taxes because the ads claim the proceeds are “tax free.” And the ads typically mentioned the names of government agencies, leading consumers to conclude that Uncle Sam provided the loans as a benefit.
In reality, borrowers must continue to pay for the maintenance of the house, property taxes and homeowners insurance. Failing to do so could lead to default on the loan and foreclosure.
Reverse mortgages are federally insured, but that’s to protect borrowers if the lender has financial problems or to reimburse the lender if the loan balance grows beyond the value of the home by the time of repayment. (In February the CFPB sued three lenders, alleging their mailings on reverse mortgages were made to appear as if they came from the federal government.)
“We want older Americans to be aware of certain factors when they see these ads,” Cordray said. “First, they need to know that a reverse mortgage is a home loan, not a government benefit. Second, they need to know that these ads may fail to tell the whole story. Third, they need to have a good plan in place in case they outlive the loan money.”
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