A report by Consumers Union and other advocacy groups has ignited a debate about whether reverse mortgages are too risky for house-rich seniors in need of extra cash, just as the nation’s new consumer agency is starting to examine the issue.
The groups are urging the new Consumer Financial Protection Bureau to boost oversight of the complex loans and to move to fight scams and deceptive marketing. Other groups, however, defend reverse mortgages.
The call for increased oversight comes as the market for reverse mortgages is poised for expansion as the baby-boom generation retires. Meanwhile, lenders are aggressively marketing reverse mortgages, tapping celebrities such as actor and former U.S. Sen. Fred Thompson as spokesmen and holding seminars at senior centers to sell the loans.
Most reverse mortgages are made under the Home Equity Conversion Mortgage program, begun in 1988 and administered by the Department of Housing and Urban Development. A borrower must be at least 62 years old and have paid off all or most of the mortgage. Instead of a monthly mortgage payment, the borrower receives payments as a lump sum, monthly cash advances or line of credit. When the homeowner dies, moves or sells the house, the loan must be repaid.
The consumer advocates say seniors should use reverse mortgages—which allow older Americans to tap into the equity in their home—only as a last resort because fees can be high and the loans could affect eligibility for government-assistance programs such as Medicaid. Also, if borrowers deplete home equity, they won’t have much to pass on to heirs and could have a harder time funding long-term care, the groups warn.
Advocates also worry that if more isn’t done to help vulnerable consumers understand the risks, the expanding reverse-mortgage market could melt down just like the subprime-mortgage market did ahead of the financial crisis.
“The public, policy makers and legislators should be aware that this time, yesterday’s subprime lenders are now preying on a growing elderly population who are trying to remain financially independent in their own homes during a depressed economy,” says the report from Consumers Union, the California Advocates for Nursing Home Reform and the Council on Aging Silicon Valley released last week.
Defending reverse mortgages, groups such as RetireSafe and the National Reverse Mortgage Lenders Association say the report fails to acknowledge recent pro-consumer changes.
“I think they’re rattling the cages here without having much concrete to offer or any evidence to back up their allegations that there are widespread problems,” said Peter Bell, president of the NRMLA.
Meanwhile, the Government Accountability Office, Congress’s investigative arm, has found examples of potentially misleading claims in loan-marketing materials. Also, the Federal Bureau of Investigation warned in a March 2009 bulletin that loan officers and real-estate agents have exploited reverse mortgages to defraud senior citizens.
Congress directed the new Consumer Financial Protection Bureau to study reverse mortgages. According to a bureau official who works closely on mortgage-related issues, the bureau is beginning to examine reverse mortgages and plans to build on the Federal Reserve’s and GAO’s efforts to improve disclosures and prevent misleading advertising.
The advocacy groups say reverse mortgages are reasonable for some seniors in foreclosure who don’t plan to move into assisted living and for low-income seniors who lack other retirement assets, don’t qualify for lower-cost alternatives and can’t meet their current mortgage obligation.
But most seniors should consider alternatives, the groups say.
Still, Barbara Stucki, a vice president at the National Council on Aging, expects homes to become more popular sources of income for retirees, given that fewer Americans have defined-benefit pensions and more Americans are living longer after retirement.
“Today’s retirement realities are daunting, and when you combine that with the economic challenges, people are going to be tapping the equity in their homes,” she said. “We want to make sure that options like reverse mortgages are viable and properly regulated.”
The industry itself doesn’t seem opposed to new regulation.
“We understand that the demographics are in our favor. The market will grow, and the need will grow because people need to fund longevity, but it will only grow if consumers feel the products are fair and the people who offer them are trustworthy,” said Mr. Bell of the National Reverse Mortgage Lenders Association. “If the regulatory regime helps get us there, that’s great.”
Write to Maya Jackson Randall at Maya.Jackson-Randall@dowjones.com
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