US Consumer Financial Protection Bureau Issues Study on Reverse Mortgages
| Date Published | 7/5/2012 |
| Author | Marja Hoek-Smit |
| Theme | |
| Country | United States |
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.
KEY
FINDINGS
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.