Link to Study
The US Congress directed the Consumer Financial Protection Bureau (CFPB) to conduct a study on reverse mortgages as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. On June 28, 2012, CFPB presented the findings of its research and proposed areas where the CFPB can play a role to protect consumers from risks posed by reverse mortgages and help consumers make better decisions about reverse mortgages. A reverse mortgage is a special type of home loan for older homeowners that requires no monthly mortgage payments. Borrowers are still responsible for property taxes and homeowner’s insurance. Reverse mortgages allow seniors to access the equity they have built up in their homes now, and defer payment of the loan until they die, sell, or move out of the home. Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. Reverse mortgages are not the only option for accessing home equity without selling the home, however. Traditional home equity loans and home equity lines of credit (HELOCs) are possibilities. Reverse mortgages offer a different set of benefits, costs, and risks to the borrower than home equity loans or HELOCs. Reverse mortgages generally are easier to qualify for than home equity loans or HELOCs, which require adequate income and credit scores. The range of products offered, the structure of the reverse mortgage market, and the consumers who use reverse mortgages have all changed dramatically in recent years. In the past, government investigations and consumer advocacy groups raised significant consumer protection concerns about the business practices of reverse mortgage lenders and other companies in the reverse mortgage industry. The new products in the market and the new ways that consumers are using reverse mortgages today add to the risks facing consumers. In designing the study, the CFPB’s objectives were to (1) provide an authoritative resource on reverse mortgage products, consumers, and markets; (2) identify and assess consumer protection concerns; and (3) explore critical unanswered questions and update the public body of knowledge to reflect new market realities. This report presents the findings from that study.
1. Reverse mortgages are complex products and difficult for consumers to understand.
Lessons learned from the traditional mortgage market do not always serve consumers well in the reverse mortgage market. The rising balance, falling equity nature of reverse mortgages is particularly difficult for consumers to grasp.
Recent innovation and policy changes have created more choices for consumers, including options with lower upfront costs. However, these changes have also increased the complexity of the choices and tradeoffs consumers have to make.
The tools – including federally required disclosures – available to consumers to help them understand prices and risks are insufficient to ensure that consumers are making good tradeoffs and decisions.
2. Reverse mortgage borrowers are using the loans in different ways than in the past, which increase risks to consumers.
Reverse mortgage borrowers are taking out loans at younger ages than in the past. In FY2011, nearly half of borrowers were under age 70. Taking out a reverse mortgage early in retirement, or even before reaching retirement, increases risks to consumers. By tapping their home equity early, these borrowers may find themselves without the financial resources to finance a future move – whether due to health or other reasons.
Reverse mortgage borrowers are withdrawing more of their money upfront than in the past. In FY2011, 73 percent of borrowers took all or almost all of their available funds upfront at closing. This proportion has increased by 30 percentage points since 2008. Borrowers who withdraw all of their available home equity upfront will have fewer resources to draw upon to pay for everyday and major expenses later in life. Borrowers who take all of their money upfront are also at greater risk of becoming delinquent on taxes and/or insurance and ultimately losing their homes to foreclosure.
Fixed-rate, lump-sum loans now account for about 70 percent of the market. The availability of this product may encourage some borrowers to take out all of their funds upfront even though they do not have an immediate need for the funds. In addition to having fewer resources to draw upon later in life, these borrowers face other increased risks. Borrowers who save or invest the proceeds may be earning less on the savings than they are paying in interest on the loan, or they may be exposing their savings to risky investment choices. These borrowers also face increased risks of being targeted for fraud or other scams. • Reverse mortgage borrowers appear to be increasingly using their loans as a method of refinancing traditional mortgages rather than as a way to pay for everyday or major expenses. Some borrowers may simply be prolonging an unsustainable financial situation.
3. Product features, market dynamics, and industry practices also create risks for consumers.
A surprisingly large proportion of reverse mortgage borrowers (9.4 percent as of February 2012) are at risk of foreclosure due to nonpayment of taxes and insurance. This proportion is continuing to increase.
Misleading advertising remains a problem in the industry and increases risks to consumers. This advertising contributes to consumer misperceptions about reverse mortgages, increasing the likelihood of poor consumer decision-making.
Spouses of reverse mortgage borrowers who are not themselves named as co-borrowers are often unaware that they are at risk of losing their homes. If the borrowing spouse dies or needs to move, the non-borrowing spouse must sell the home or otherwise pay off the reverse mortgage at that time. Other family members (children, grandchildren, etc.) who live with reverse mortgage borrowers are also at risk of needing to find other living arrangements when the borrower dies or needs to move.
The reverse mortgage market is increasingly dominated by small originators, most of which are not depository institutions. The changing economic and regulatory landscape faced by these small originators creates new risks for consumers.
4. Counseling, while designed to help consumers understand the risks associated with reverse mortgages, needs improvement in order to be able to meet these challenges.
Reverse mortgages are inherently complicated, and the new array of product choices makes the counselor’s job much more difficult. Counselors need improved methods to help consumers better understand the complex tradeoffs they face in deciding whether to get a reverse mortgage.
Funding for housing counseling is under pressure, making access to high-quality counseling more difficult. Some counselors may frequently omit some of the required information or speed through the material.
Some counseling agencies only receive payment if and when the reverse mortgage is closed (the counseling fee is paid with loan proceeds), which could undermine counselors’ impartiality.
Some borrowers may not take the counseling sessions seriously. Additional consumer awareness and education may be necessary.
Counseling may be insufficient to counter the effects of misleading advertising, aggressive sales tactics, or questionable business practices. Stronger regulation, supervision of reverse mortgage companies, and enforcement of existing laws may also be necessary.
5. Some risks to consumers appear to have been adequately addressed by regulation, but remain a matter for supervision and enforcement, while other risks still require regulatory attention.