WASHINGTON — As some older Americans try to improve their finances by tapping home equity through reverse mortgages, many are at risk of ending up in a worse situation because of confusion over the complex terms of the loans, according to a new government report.
There is a growing tendency for seniors to obtain the money at a younger age and in a lump sum instead of annual installments designed to spread the dollars through their retirement — problems that could accelerate as the baby boom generation goes gray, according to the report released Thursday by the Consumer Financial Protection Bureau.
With about 10 percent of reverse mortgages in default because the homeowners failed to keep up with required property tax and insurance payments, the bureau said it was worried about the increased use of the product over the last decade and was looking into new regulations. In addition, the complexity of reverse mortgages makes some senior citizens prime targets for scammers, the report said.
“There may be circumstances where the reverse mortgage is appropriate … but the seniors I’ve talked to really are a bit confused about what it is all about,” said Hubert H. “Skip” Humphrey III, head of the bureau’s Office of Older Americans.
“They’re told there’s money out there that they can get, but there isn’t always a description of the cost associated with the product. And the interest rates and other parts of this product are often confusing,” Humphrey said.
The consumer bureau is considering requiring better disclosure of reverse mortgage terms and stricter oversight, including limits on misleading advertising. The agency had planned to hold a hearing on reverse mortgages in Tampa, Fla., this week, but canceled it because of Tropical Storm Debby.
Consumers Union has been warning that reverse mortgages are ripe for abuse and that people should use “significant caution” in exploring the option. This week, the group urged tougher federal oversight of the loans and published tips for consumers considering reverse mortgages.
“It is an expensive way to borrow,” said Norma Garcia, a senior attorney with the organization. “It’s not for everyone.”
Reverse mortgages allow people at least 62 years old to take out loans based on the equity built up in their homes. But unlike a traditional home equity loan, a reverse mortgage does not require any monthly payments. The loan, which is easier to qualify for than a home equity line of credit, doesn’t come due until the home is sold or the person moves out or dies.
It’s an attractive option for people who want to enhance their retirement income without selling their home — as long as they’re aware of the risks, said Richard Cordray, the consumer bureau’s director. The report found that “though many older Americans are aware of reverse mortgages, they struggle greatly to understand this complicated product and the trade-offs involved,” he said.
For example, because the interest is added to the loan amount each month, the size of the loan can grow to exceed the home’s value. Under federal rules, borrowers or their heirs generally aren’t required to repay more than the home’s value. But that can mean there’s no equity left in the home to pass down to the borrower’s children.
Borrowers also can face foreclosure if they don’t stay current on property taxes and insurance premiums. As of the end of February, 9.4 percent of reverse mortgages were in default on taxes or insurance payments, up from 8.1 percent in July 2011, the report said.
Peter Bell, president of the National Reverse Mortgage Lenders Association, an industry trade group, said that the report “raises valid questions” and that the association would work with the consumer bureau to find the answers.
“All of us want seniors and their children to have a better and more in-depth understanding of reverse mortgages,” Bell said. Last week, the group launched a consumer education effort called “Borrow With Confidence.”