In a paper on the issue, the Consumer
Financial Protection Bureau (CFPB) says that "Many older consumers and their
families are confused and frustrated by the terms and conditions of reverse
mortgages." Since it began accepting
them in December 2011 CFPB says it has received over 1,200 complaints about
reverse mortgages, 1 percent of all mortgage complaints. As of September 30, 2014 there were an
estimated 628,000 reverse mortgages outstanding.
Most reverse mortgages are sponsored
through the Federal Housing Administration's (FHA's) Home Equity Conversion
Mortgage (HECM) program and CFPB said while these mortgages represent only 1
percent of the mortgage market today it expects their popularity to increase in
coming years. In addition to the large
numbers of baby boomers reaching the eligible age for the program (62) there
are other factors expected to contribute to the increase. Forty-one percent of Americans age 55-64 have
no retirement savings accounts and those who do have a median account balance
of only $103,200. Also more and more
Americans are retiring without pensions and the Employee Benefit Research Institute (EBRI) finds that 44 percent of baby
boomers will not have enough income in retirement for basic expenses and
uninsured health care costs. Women, in particular,
have an increased likelihood of outliving assets due to, among other things,
lower savings and lower private
pension coverage.
The homeownership rate for Americans aged
55-64 is 74 percent and homeowners aged 62
and older hold a combined $3.84 trillion in equity in their homes. This equity will likely play an increasing role in supplementing retirement
income for many older homeowners.
The Bureau's Office of Older Americans just
published Snapshot of reverse mortgage
complains December 2011 - December 2014 highlighting some of the problems
they see seniors having with the mortgages and some suggestions of ways elders
and their families should protect themselves against problems with the products.
Much of the frustration noted by CFPB
grows out of ways in which reverse mortgages (also referred to here as HECM)
differ from the regular mortgages to which homeowners are accustomed. Rather than the credit and income-based underwriting used in
traditional mortgages, a borrower's age (62) and the amount of equity in the home are the primary factors used
to qualify for a HECM. (As of March 2,
2015, the underwriting for HECMs
will consider credit history and financial assessments of prospective borrowers, though loan
qualification will remain primarily equity-driven.)
Unlike traditional "forward" mortgages,
reverse mortgages do not require a borrower to make monthly mortgage
payments although borrowers are required to pay property taxes and maintain
homeowners insurance. Loan proceeds are
generally given to borrowers as a lump sum, monthly payments, or as a line of
credit and the interest and fees on the mortgage are added to the loan balance
each month. The total loan
balance becomes due upon the sale of the home, death of the borrower(s),
or if the borrower(s) permanently
move from the home. In addition, a payment deferral period may be available to some non-borrowing
spouses following the borrowing spouse's death. Mandatory housing counseling is required
before the borrowers are given the mortgage.
CFPB categorized the complaints it has
received as:
-
Problems
when unable to pay (loan modifications, collection, foreclosure)
-
Making
payments (loan servicing, payments, escrow accounts)
-
Applying
for the loan
-
Signing
the agreement
-
Receiving
a credit offer

Despite the categorization above, CFPB
reports that most of the complaints arose out of borrower confusion about the
terms of their loan especially regarding denials for changing those terms. The most common complaint, and one that came
from both borrowers and their adult children involved adding additional
borrowers to the loan in order to extend its term or allowing children to
assume the loan for an aging or deceased parent. Often these complaints come about after the death of a borrower when
non-borrowing family members living in the home did not realize the loan had to
be repaid until they were contacted by the lender. CFPB said borrowers frequently fail to
understand that reverse mortgages are based on actuarial tables so adult
children may retain the home only by paying off the loan or paying 95 percent of its appraised value.
Because the percentage of equity that can
be withdrawn is based on age (and thus life expectancy), couples frequently borrow
only in the name of the older spouse to increase the amount of the loan. They then claim surprise that the loan must be
repaid upon the borrower's death. Some
consumers report that their loan originator falsely assured them they would be able to add the other spouse to the loan
at a later date. CFPB reports that a
recent FHA change to HECM appears to have eliminated this problem for loans
originated after August 4 2014 by incentivizing the inclusion of both spouses
as borrowers.
Borrowers also claim they have been unable
to change the interest rate on their loan and feel they are being overcharged
or that the rate on their variable rate loan has increased too rapidly.
Loan servicing is also a source of frequent complaints,
many centering on a lack of responsiveness. While servicers are required to notify the
borrower or the borrowers heirs within 30 days that a repayment has been
triggered and told the options for paying the loan balance there are still
numerous complaints about repayment problems.
Consumers
complain that loan servicers and lenders do not provide a clear process for paying off the loan, others describe problems with the appraisal
process such as lengthy
delays, improperly performed appraisals, and inflated home values.
Many consumers complain that they were
either unaware of their responsibility or unable to pay property taxes and
homeowners insurance, triggering defaults.
They describe unsuccessful attempts to halt foreclosure proceeding by
paying past due taxes or arranging payment plans other consumer complain that
loan servicers have determined
incorrectly that their taxes are past due.
Other complaints about servicers concern
their failure to keep accurate records or that they present obstacles when borrowers
attempt to prevent foreclosure. In the
later cases consumers complain servicers lose documents, do not respond to
questions or requests, or fail to halt improperly imposed foreclosure
proceedings.
CFPB notes that servicing problems
exacerbate many of the other problems that borrowers and their families
experience with reverse mortgages.
HUD has
issued more than 10 policy changes to the HECM program since CFPB started
receiving complaints. Problems with tax
and insurance payments prompted the change in financial assessments that goes
into effect next month and other changes, as mentioned above, affect surviving
non-borrowing spouses although those who obtained reverse mortgages prior to
the change may continue to encounter difficulties.
CFPB concludes that for millions of older
Americans, especially those without sufficient reserves for retirement a home
equity loan could help them achieve economic security later in life. To this end it is essential that the terms,
conditions, and servicing of reserve mortgages be fair and transparent so that
consumers can make informed decisions regarding their options.
The Bureau makes three suggestions for
persons having or seeking these loans:
1. Verify who is on
the loan and if there is more than one borrower check with the servicer to make
sure its records on the matter are accurate.
2. If the loan was
taken out in the name of only one spouse make plans for the non-borrowing
spouse. Check with the servicer to see
if that party can qualify for a deferral in the event of the borrowing spouse's
debt. If there is enough equity,
consider taking out a new reverse mortgage in the names of both spouses. Consider retiring the reverse mortgage with a
traditional mortgage even if other family members need to cosign. If it will be necessary to sell the home make
plans for that eventuality.
3. Talk to your
children and heirs - make a plan for any non-borrower family members living in
the home
Attorney Barbara S. Mishkin, commenting about the CFPB report on Ballard and Spahr's blog, says that its concluding comment, that the terms, conditions, and servicing of these loans must be fair and transparent should be taken as warning that the CFPB is "likely to consider imposing additional disclosure and other requirements on reverse mortgages."