In response to the high number of complaints it has received concerning reverse mortgages, the Consumer Financial Protection Bureau (CFPB) has released a set of ‘tips’ consumers can use when shopping for a reverse mortgage in order to better protect themselves and their family members.
One of the basic problems related to reverse mortgages, the CFPB says, is that many consumers do not understand the terms of the loan, how it works, or what the long-term financial impacts will be.
To help ensure consumers are better protected, the CFPB is advising that borrowers take the following steps when taking out a reverse mortgage:
- Verify who is on the loan: If two borrowers took out the reverse mortgage, they should check with the reverse mortgage company to make sure its loan records are accurate.
- Plan ahead for the non-borrowing spouse: Consumers who took out a Home Equity Conversion Mortgage (HECM) in the name of only one spouse before Aug. 4, 2014, should contact their loan servicer to find out if the non-borrowing spouse may qualify for a repayment deferral. If not, they should make a plan in the event the borrowing spouse passes away first. Couples with enough remaining equity could consider taking out a new reverse mortgage, but they will incur new loan fees. Some surviving spouses may also be able to pay off the reverse mortgage, or take out a traditional mortgage, perhaps with another family member. Many will need to plan for where they will live after the home is sold to repay the loan. If the loan was originated after Aug. 4, 2014, new changes to the HECM program will allow the non-borrowing spouse, meeting certain conditions, to remain in the home.
- Plan ahead for other family members living in the home: Consumers should make sure any children or other family members living in the home know what to expect when the reverse mortgage is due. If those members want to keep the home, the borrower should contact their reverse mortgage company to have them explain their options. They can also contact a U.S. Department of Housing and Urban Development-approved housing counselor to explore their options.
‘Consumer complaints tell us that the complex terms of reverse mortgages continue to be misunderstood,’ says Richard Cordray, director of the CFPB, in a statement. ‘As more baby boomers choose reverse mortgages to tap into their home equity, they need to understand the unique terms and features of this product.’
The bureau says it has received more than 1,200 complaints related to reverse mortgages since 2011. Many of these complaints show a mismatch between consumer expectations and the way the product functions, the CFPB says. Many consumers, for example, struggle with understanding how quickly their loan balance will go up and home equity will fall.
Consumers have also complained about the inability to add new borrowers to an existing loan. As explained in the CFPB's press release, reverse mortgages prohibit spouses, heirs and dependents from taking over the loan. This is because loan amounts are, in part, calculated using a borrower's age and the loan repayment is triggered when the last borrower moves out or dies. This can be a problem for surviving spouses and children. Family members complained to the CFPB about not being able to be added to the loan so they could keep the home.
Consumers have also sometimes found the process of paying off the debt frustrating. When the borrower dies, heirs can sell the home, repay the loan balance, or pay 95% of the property's assessed value. Consumers have complained that loan servicers do not provide a clear process to allow them to settle the debt. Consumers have also complained about appraisal delays, improperly performed appraisals and inflated home values so they would have to pay more, according to the CFPB. Others complained about a lack of response from loan servicers, including unanswered calls, and a lack of response to written requests.
Consumers have also complained about struggles with foreclosure due to issues with property taxes and homeowners' insurance. As the CFPB explains, although reverse mortgages require no monthly mortgage payments, borrowers are nevertheless responsible for property taxes and homeowner's insurance. A previous CFPB report found that nearly 10% of reverse mortgage borrowers are at risk of foreclosure because they have failed to pay these expenses. Consumers who complained to the CFPB described unsuccessful attempts to halt foreclosure proceedings by paying overdue taxes. Others insisted that their loan servicers had determined incorrectly that their taxes were overdue. Sometimes these inaccuracies were due to a failure by loan servicers to keep accurate records, the CFPB says.