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."
