Reverse Mortgages Put Confused Homeowners at Risk of Foreclosure

The Consumer Financial Protection Bureau (CFPB) ""released a report"":http://files.consumerfinance.gov/a/assets/documents/201206_cfpb_Reverse_Mortgage_Report.pdf Thursday showing that although reverse mortgages are meant to help borrowers in retirement, they are in fact causing problems for many who don't fully understand them.

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A reverse mortgage is a type of home loan that lets older homeowners access the equity they have built up on their homes and defer loan payment until they sell the home, move out, or pass away. The original purpose of reverse mortgages was to allow these homeowners to convert home equity into an income stream or line or credit to use in retirement. Borrowers were largely expected to age in place with their loans, living in their current homes until they passed or needed skilled care.

Reverse mortgages require no monthly mortgage payments, but borrowers must still pay property taxes and homeowner's insurance. The report showed that nearly 10 percent of reverse mortgage borrowers are at risk of foreclosure because they failed to pay those costs.

""Reverse mortgages are complex and have the potential to become a much more pervasive product in the coming years as the baby boomer generation enters retirement,"" said CFPB director Richard Cordray. ""With one in ten reverse mortgages already in default, it is important that consumers understand what they are signing up for and that it is the right product for them.""

The report found that many reverse mortgage borrowers do not understand how their loan balance will rise and their home equity will fall over time. In addition, the influx of new choices brought on by innovations and policy changes have made the matter too complex for many homeowners. The bureau further found that the tools currently available to help consumers understand the risks and tradeoffs are not enough. The report called for improved methods for housing counselors to help consumers understand their choices.

There are many other problems with reverse mortgages as they currently stand, the report pointed out. Many consumers are getting reverse mortgages before the age of 70 (with the most common age for a new borrower being 62, the first age at which reverse mortgages are available), and some are even getting them before retiring.

""These borrowers will have fewer resources to pay for everyday and major expenses later in life and may find themselves without the financial resources to finance a future move-whether due to health or other reasons,"" said the report.

Another problem is that 70 percent of borrowers are taking out the full amount of proceeds as a single lump sum instead of treating the payment as an income stream. As a result, these borrowers have fewer available financial resources later in life. They may not be able to continue paying taxes and insurance on their homes, leading to potential foreclosure. The report found that borrowers who save or invest their money may earn less on the savings than they spend paying interest on the loan.

Finally, the bureau addressed the issue of deceptive or misleading marketing materials about reverse mortgages. The report cited examples of mailers that depict reverse mortgages as a government benefit or entitlement program in the vein of Medicare and use images resembling government seals to entice consumers. It can be difficult for consumers to tell that a reverse mortgage is a financial product, not a government benefit.

In order to address these issues and help consumers better understand reverse mortgages, the CFPB has released a ""request for information"":http://files.consumerfinance.gov/f/201206_cfpb_Reverse_Mortgage_FRnotice.pdf.