Report: Reverse mortgages still confusing
More younger retirees pulling equity out of their homes in a lump sum, raising concerns about what will happen when they get older.
Reverse mortgages are likely to become more popular as baby boomers age, but the products remain confusing, according to a report by the new Consumer Financial Protection Bureau.
The mortgages, which allow homeowners 62 and older to tap the equity in their home while still living there, are used by fewer than 3% of eligible homeowners. But the number of reverse mortgages among younger eligible borrowers has jumped.
According to the report, 9% of homeowners who got a reverse mortgage were just 62, up from 2% during the 1990s. Among recent borrowers, nearly half are under 70.
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When homeowners take out a reverse mortgage, they have two options. They can elect to receive the proceeds all at once to tap them as needed, as they would with a home-equity line of credit, or they can receive a set monthly payment for life. One thing that concerns the CFPB is that about 70% of borrowers are taking out the money in a lump sum, up from about 40% in 2008.
"Our study also found that though many older Americans are aware of reverse mortgages, they struggle greatly to understand this complicated product and the tradeoffs involved," CFPB Director Richard Cordray said. "They may focus primarily on the amount of money they can garner in the short term and underestimate the long-term costs."
Some homeowners who are eligible for reverse mortgages also could refinance their homes and take out cash or get a line of credit. But qualifying for those loans can be difficult, and they require the homeowners to make payments. While a reverse mortgage does not require payments, it is more expensive to access than other types of loans.
About 10% of reverse-mortgage borrowers are in default. Some have lost their homes because they did not keep up with property taxes and homeowners-insurance payments.
Deceptive advertising of reverse mortgages is also a problem, Cordray said.
"Just recently, we saw a mailer that portrayed a reverse mortgage as a government benefit rather than a financial product," he said. "The mailer came with what appeared to be a government seal and claimed that a phony piece of legislation would help seniors save their homes. All the senior had to do was call a supposed 'senior helpline' in order to receive the so-called government benefit. The mailer also contained blatantly false information about loan repayment options."
The study was required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. One goal of the review was to determine whether the agency should push for more regulation of reverse mortgages. In 2010, the Board of Governors of the Federal Reserve System suggested, among other reforms, limiting misleading advertising and improving disclosure. The quality of required counseling also has been questioned.
In the meantime, the CFPB has created a four-page consumer guide and also accepts complaints about reverse-mortgage products.
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The thing I don't understand is why everyone posting on this topic seems to think the are some kind of genius on everything about reverse mortgages.
1. The lender does not takee title to the home. The homowner still owns the home. The lender as a lien just like any other motrgage.
2. Homeowners are required to undergo counseling from a HUD certfied counselor before they can obtain a loan to discuss options and how they work. Chidren, non-owner spouses and any other interested party are encouraged to attnd the session.
3. bulldustin, if you aren't on the title, you haveno right to the house. This holds true with a traditional mortgage, just not reverse mortgages.
James, I agree with most of what you say but what does exclusionary zoning have to do with cheap housing and reverse mortgages? Exclusionary zoning is the reason why someone can't put a garbage dump in the middle of a residential district. Zoning has no effect on the cost of building a home. They don't m****duce homes in a factory (save modular/mobile homes). Zoning, by its nature, depresses the value of the land in a residential district (only being able to build a single family dwelling versus a heavy manufacturing complex).
By the way, comparing cars to houses is like comparing cars to houses or apples to celery.
I'm aware of one case where the homeowner lost her home. And prior to this news article, I didn't understand how one could lose one's home when a bank was paying the homeowner.
So, reverse mortgages could be the "silver cloud, with a black lining," to reverse the old saying.
Many folks simply aren't up to the math required to make an educated decision and thus, I see too many possibilities for elderly to be taken advantage of, or simply making the wrong decision.
They get you coming and going. Say you borrow $100K at 5% and pay it back over 30 yrs. You have to pay back $193K. Just holding the home value at constant dollars so we can compare apples with apples. You take out a reverse mortgage and get $364/mo for the rest of your life. You could've just bought a single premium immediate life annuity (based on your age and sex) and also gotten $364/mo for the rest of your life. Suppose it cost $65K. Now when you die your $100K home goes to the people who sold you the reverse mortgage. So it cost you $93K extra when you bought it and another $35K when you reverse mortgaged it. Total loss is $128K.
Does anyone take out a 30-yr mortgage to buy a car? Does anyone get a reverse mortgage on their car? Does anyone worry about their car's value like they worry about their property values? NO! Because the car market is free. You can buy any car you choose and drive it on any road you choose. So too should you be able to buy any home you choose and place it on any residential lot you choose. End exclusionary zoning and you'll be able to buy a home as easily and cheaply as you buy a car. A car is much more complicated to build than a home. Freedom leads to prosperity.
Reverse Mortgages are great products for the banks or lending institutions that issue them. They get an asset for 30-40% market value, and instead of giving the people who have owned the house straight money payments, they couch payments in the form of a loan. This adds fees to the owner.
The former owners are now paying the bank for the money they receive. The cost of getting this money can add up to another 6-12% of the value of the house. Then, when the former owner dies or moves out, the bank can sell the house and get within 20% of the market value if not more.
Banks can also create a derivatives based on these reverse mortgages that will give them more earnings. In my opinion reverse mortgages are a great money making idea that looks like a baby-boomer lifeline. However, the product is really a potential financial windfall for financial institutions.
About Teresa Mears
Teresa Mears is a veteran journalist who has been interested in houses since her father took her to tax auctions to carry the cash at age 10. A former editor of The Miami Herald's Home & Design section, she lives in South Florida where, in addition to writing about real estate, she publishes Miami on the Cheap to help her neighbors adjust to the loss of 60% of their property value.
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