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Report: Reverse mortgages are risky, expensive

The Consumer Financial Protection Bureau is considering whether new safeguards are needed to protect borrowers from abusive industry practices.

By Karen Datko Dec 9, 2010 10:48AM

This post comes from James Limbach at partner site ConsumerAffairs.com.

 

The growing market for reverse mortgages is raising concerns that an increasing number of seniors are being misled into signing up for a complicated financial product that may squander their equity prematurely or put them at risk for losing their homes.

In a new report, advocates for consumers and seniors are calling for stricter oversight of the reverse mortgage market and new consumer protections for borrowers.

 

"Reverse mortgages are a very risky deal for borrowers who don't understand the complicated terms of the loan and how quickly fees and interest charges can add up," said Norma Garcia, senior staff attorney for Consumers Union, the nonprofit publisher of Consumer Reports. "Reverse mortgages should only be a last resort for seniors who want to stay in their homes and have no other alternatives to supplement their income."

 

Safeguards needed?

The report and accompanying tips for consumers are being issued as the newly authorized Consumer Financial Protection Bureau examines reverse mortgages and considers whether new safeguards are needed to protect borrowers from abusive industry practices. The Federal Reserve Board is considering a set of proposed regulations on reverse mortgages as well.

 

As the baby boomer generation retires, the market for reverse mortgages is growing fast. Reverse mortgages let borrowers who are 62 or older get cash payment or lines of credit by tapping the equity in their home.

 

The reverse mortgage loan becomes due when the borrower dies, leaves the home for 12 consecutive months or more, or fails to maintain the property or pay homeowners insurance or property taxes. Borrowers must pay a loan origination fee, closing costs, and compounding interest on the loan principal, which can be significant.

 

Concerns raised

The groups documented a number of concerns they believe underscore the need for stronger oversight, including:

  • Misleading marketing claims. A Government Accountability Office review found that 26 marketers of federally insured reverse mortgages engaged in questionable sales tactics and made potentially misleading claims that minimized the risk for borrowers.
  • Seniors' vulnerability. University of Iowa researchers concluded that 35% to 40% of older consumers studied had impaired decision-making abilities that made them especially vulnerable to misleading advertising.
  • Cross promotion of other unsuitable financial products. Seniors are also targeted with aggressive promotion of other financial products like long-term-care insurance or annuities that may not be suitable for them. While lenders and brokers selling reverse mortgages are prohibited from promoting annuities or insurance, insurance agents can legally direct senior clients to get a reverse mortgage to fund insurance products.
  • Reverse mortgage defaults are triggering foreclosures. HUD's Office of the Inspector General found that an increasing number of borrowers had defaulted because they had not paid their taxes or homeowners insurance premiums as required. As of March, 20,631 reverse mortgage loans were in default.
  • Reverse mortgage loan bailouts are on the rise. The total sum of reverse mortgages taken over by a federal insurance fund has more than quadrupled in four years, from $81.3 million in 2004 to $381.3 million in 2008.

"Lenders are aggressively marketing reverse mortgages while assuming almost no responsibility for whether the loans are suitable for borrowers," said Prescott Cole, senior attorney for California Advocates for Nursing Home Reform. "Now that reverse mortgages are becoming more widespread, it's time for some common sense oversight to protect consumers and taxpayers."

 

More from ConsumerAffairs.com and MSN Money:

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