CFPB Details Reverse Mortgage Complaints

In a paper on the issue, the Consumer Financial Protection Bureau (CFPB) says that "Many older consumers and their families are confused and frustrated by the terms and conditions of reverse mortgages."  Since it began accepting them in December 2011 CFPB says it has received over 1,200 complaints about reverse mortgages, 1 percent of all mortgage complaints.   As of September 30, 2014 there were an estimated 628,000 reverse mortgages outstanding.  

Most reverse mortgages are sponsored through the Federal Housing Administration's (FHA's) Home Equity Conversion Mortgage (HECM) program and CFPB said while these mortgages represent only 1 percent of the mortgage market today it expects their popularity to increase in coming years.  In addition to the large numbers of baby boomers reaching the eligible age for the program (62) there are other factors expected to contribute to the increase.  Forty-one percent of Americans age 55-64 have no retirement savings accounts and those who do have a median account balance of only $103,200.  Also more and more Americans are retiring without pensions and the Employee Benefit Research Institute (EBRI) finds that 44 percent of baby boomers will not have enough income in retirement for basic expenses and uninsured health care costs. Women, in particular, have an increased likelihood of outliving assets due to, among other things, lower savings and lower private pension coverage.

The homeownership rate for Americans aged 55-64 is 74 percent and homeowners aged 62 and older hold a combined $3.84 trillion in equity in their homes.  This equity will likely play an increasing role in supplementing retirement income for many older homeowners.

The Bureau's Office of Older Americans just published Snapshot of reverse mortgage complains December 2011 - December 2014 highlighting some of the problems they see seniors having with the mortgages and some suggestions of ways elders and their families should protect themselves against problems with the products.

Much of the frustration noted by CFPB grows out of ways in which reverse mortgages (also referred to here as HECM) differ from the regular mortgages to which homeowners are accustomed.  Rather than the credit and income-based underwriting used in traditional mortgages, a borrower's age (62) and the amount of equity in the home are the primary factors used to qualify for a HECM.  (As of March 2, 2015, the underwriting for HECMs will consider credit history and financial assessments of prospective borrowers, though loan qualification will remain primarily equity-driven.)

Unlike traditional "forward" mortgages, reverse mortgages do not require a borrower to make monthly mortgage payments although borrowers are required to pay property taxes and maintain homeowners insurance.  Loan proceeds are generally given to borrowers as a lump sum, monthly payments, or as a line of credit and the interest and fees on the mortgage are added to the loan balance each month.  The total loan balance becomes due upon the sale of the home, death of the borrower(s), or if the borrower(s) permanently move from the home. In addition, a payment deferral period may be available to some non-borrowing spouses following the borrowing spouse's death.  Mandatory housing counseling is required before the borrowers are given the mortgage.

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