Reverse mortgages offer financial security to many seniors. But not all reverse mortgages are created equal, and those considering the option should think carefully about the ramifications.
Unlike a traditional mortgage requiring monthly payments by the borrower, a reverse mortgage uses the equity in a home as a source of income. Homeowners who are 62 or older can get cash payments or lines of credit by drawing on that equity.
It sounds simple, but some reverse mortgage agreements can be quite complex. Borrowers have to pay a fee to start the process, plus closing costs and compounding interest on the principal of the loan. The loan becomes due when the borrower dies, leaves the home for a year or longer, doesn’t maintain the property or fails to pay the property taxes or homeowners insurance.
The costs can add up fast. They can be crippling in cases where the borrower doesn’t fully understand the agreement. And some sellers use seniors’ precarious financial situations to try to sell them additional products that may not suit their needs.
Such cross-promotions are often used to sell seniors annuities or long-term care insurance. Some sellers pressure their potential customers to buy those products in order to get a reverse mortgage.
Salespeople can be downright misleading, not only on the potential risks of reverse mortgages but also in cross-promoting their products.
This has opened the industry to criticism from consumer advocates who say buyers are often sold financial products that don’t do them much good.
The federal Department of Housing and Urban Development requires counseling for people considering reverse mortgages. However, a recent report by Consumers Union, publishers of Consumer Reports, indicates such counseling often does not take place.
The Federal Reserve Board in August called for some big changes in the way reverse mortgages and associated products are sold.
The Federal Reserve Board changes would:
- Improve disclosure and make clearer all advertising of reverse mortgages.
- Ban specific unfair sales practices.
- Make consumers better aware of their right to rescind sales.
- Make sure consumers get new disclosures when re-negotiating an existing reverse mortgage.
Critics including Consumers Union say the Federal Reserve Board’s new rules don’t go far enough. They’d like to see better counseling, including a fair determination that a reverse mortgage is in the borrower’s best interest. There are even calls for sellers to have a fiduciary responsibility, meaning they could be held liable if they don’t act in the customer’s best financial interest.
This past Tuesday, the new federal Consumer Financial Protection Bureau announced it would join with the Conference of State Banking Supervisors to regulate mortgage companies, along with student loan providers and payday lenders. Elizabeth Warren, the Harvard law professor who’s setting up the bureau, said the agreement will “begin the process of ensuring that all lenders comply with the same basic rules.”
For more on reverse mortgages, call HUD at 800-CALL-FHA (2255-342) or the Federal Trade Commission at 877-FTC-HELP (382-4357).
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