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Reverse Mortgages Warning: Hidden Pitfalls and Consumer Complaints
Heavy advertising by those selling reverse mortgages could convince anyone that this product will get you to nirvana. The sellers tout them, promising to let you “live the life of your dreams” or “have a better retirement”. Really?
The Federal government has responded to numerous complaints by borrowers about reverse mortgages (home equity conversion mortgages or HECMs) and issued a summary report. It’s available through the Consumer Financial Protection Bureau but if you don’t have time to read it, we summarize for you it here at AgingInvestor.com.
The reverse mortgage complaints submitted to the CFPB demonstrate the wide range of problems some consumers have with these loans. The largest volume of complaints, according to the report, center on difficulty in trying to change the terms of the loans. When borrowers want to refinance the loan or add borrowers, they can’t. Some borrowers do not understand that the loan proceeds as well as accrued interest on the loan over time substantially decrease the amount of available equity. What this tells us at AgingInvestor.com is that despite mandatory “counseling” before getting the mortgage, the borrower is not getting the message. Whether that is a defect in the counseling itself or the consumer being swayed by the “live the life of your dreams” advertising we do not know. What we do know is that borrowers get upset when they find out they can’t refinance these loans.
Other consumers complain that lenders refuse to lower their loans’ interest rates and they feel that as interest rates have declined, that they’re being overcharged. Trying to change the terms of the loan at all is very problematic. When adult children want to be added as borrowers they can’t be added. Borrowers do not understand that adult children can only retain the home for an aging parent by paying off the entire loan balance or by paying 95% of the value of the home. Is this a failure to understand the mandatory counseling their parents were given? Or is it that this critical detail is lost in the effort to get an older homeowner to take the loan, “live the life of their dreams” and have a wonderful time with the loan proceeds?
As we see it, the worst outcome of a reverse mortgage occurs when title is transferred to one spouse in order to get the HECM, perhaps because he or she is of an age that makes it possible to borrow more equity than the other spouse could do. The loan is taken in the name of that one spouse only. The borrowing spouse later dies. The non-borrowing spouse then will lose the home. Distraught widows and widowers face foreclosure in this scenario. Of course they can’t pay off the loan or they wouldn’t have needed the HECM in the first place. Some consumers report that their loan originator falsely assured them they would be able to add the other spouse to the loan at a later date.
The U.S. Department of Housing and Urban Development (HUD) is changing this horrible problem. It issued a mortgagee letter in August 2014 that provides that non-borrowing spouses meeting certain conditions, may remain in the home after the death of the borrower spouse but only for loans originated after the date of this letter. Most HECMs originated after August 4, 2014 will be made in both spouses’ names. For the rest of the many borrowers whose loans are older than that, a widowed person will likely lose the home after the borrowing spouse dies. So much for living the life of their dreams.
If you are in a position to advise clients about the pros and cons of a reverse mortgage, be sure that you know these details before directing anyone to such a loan. Yes, in some cases, a HECM can be a lifesaver. But as we see it, that’s only a good idea when there are no other options available to pay the basic cost of living in the home and surviving there to the end of life. It’s not prudent for any consumer to have a lavish lifestyle on borrowed money, only to run out of equity when they need money most: when disabled and in need of care. Consumers need to be cautioned not to take out equity and recklessly spend it as if there were no consequences to depleting what is for many, their only significant asset.
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