While reverse mortgages are only available to a select group of consumers (homeowners aged 62 years and older), the product still makes up a large portion of complaints received by the Consumer Financial Protection Bureau (CFPB).
According to a recent report from the agency, consumers are still confused about their loan terms and have filed approximately 1,200 reverse mortgage complaints to the CFPB between December 2011 and December 2014.
“Consumer complaints tell us that the complex terms of reverse mortgages continue to be misunderstood,” CFPB Director Richard Cordray, said. “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. Our advisory can help those who have already chosen reverse mortgages to plan ahead for loved ones.”
The reverse mortgage
market is about 1% of the size of the traditional mortgage market, with 628,000 outstanding loans, according to the CFPB. Most reverse mortgage
s today are federally insured through the Federal Housing Administration’s (FHA
) Home Equity Conversion Mortgage (HECM) program, which means they must comply with the related regulations.
The most frequent complaint in the 15-page report involves consumers who are confused about the requirements and terms of reverse mortgages. Many are frustrated when they are unable to refinance their loans because there is insufficient remaining equity in their homes.
The CFPB reported these complaints suggest that some homeowners may not understand that the loan proceeds as well as the accrued interest on the loan overtime will substantially decrease the amount of available equity.
While reverse mortgages are only available to people over the age of 62, only about 42% of the complaints were from consumers who described themselves as 62 or older. The remaining consumers likely included the younger spouses or family members of borrowers, according to the CFPB.
According to the report, the top reverse mortgage complaints are:
- Distress about the inability to add new borrowers to an existing loan: Reverse mortgages prohibit spouses, heirs, and dependents from taking over the loan.
- Frustration with runarounds when trying to pay off the debt: When the borrower dies, heirs can sell the home, repay the loan balance, or pay 95 percent of the property’s assessed value. Consumers complained that loan servicers do not provide a clear process to allow them to settle the debt.
- Struggles with foreclosure due to issues with property taxes and homeowners’ insurance: Reverse mortgages require no monthly mortgage payments but borrowers are still responsible for property taxes and homeowner’s insurance.
The Baby Boomer generation is predicted to account for nearly one in every four dollars spent on housing in the next five years, according to a recent report by The Demand Institute. Adding to that is the estimated 10,000 seniors a day who turn 65; the reverse mortgage industry is poised for growth.
Reverse mortgages have gained a bad reputation over the years and have developed a misconception of being a last resort for struggling seniors. However, recent regulation changes, like the new HECM assessment, have transformed the product into a viable financial planning tool.
Click here to read the CFPB’s report.