Most of us have seen the commercials touting the many benefits of reverse mortgages. When they became more popular and well known, many believed these financial products were the solution for senior citizens in need of a cash influx. Now, though, there are new worries that some government agencies insist are putting the elderly at risk. In fact, in the past few years, there have been substantial changes in reverse mortgages that are “more complex” with higher “long term costs”, according to a report by National Consumer Law Center.
The report was one of the more in-depth efforts made on the subject and what the investigation discovered should serve as a reminder for families to closely gauge their options and not just those encouraged by a lender, which often equate to “excess profits”. Not only that, but a new trend suggests younger borrowers or those just entering their retirement are cashing out their equity, which is leaving them vulnerable and with fewer options.
Understanding Reverse Mortgages
A reverse mortgage is a loan secured by the home that does not require repayment until the borrower dies, moves out of the home permanently, or sells the home. The borrower is responsible for general maintenance and upkeep on the property, and for paying property taxes and homeowners insurance. The amount the borrower will receive depends on the value of the home, current interest rates, and the age of the borrower. Most are insured by the Federal Housing Administration. In the beginning, the benefits for older Americans were many, especially if they were unprepared for retirement; however, in recent years, the number of predatory lenders has grown considerably and as a result, it can be difficult to find a lender who is ethical and operates within the confines of the financial laws.
In fact, some have compared the current environment to that of subprime loans before the bottom fell out in 2008. That alone is troublesome, but it gets worse as adult children learn too late the details of the loan their parents entered into. It’s usually then that the shortcomings in the regulatory efforts are realized.
For their part, lenders are busy growing their businesses with aggressive staff members, all of whom are trying to capture the exploding growth of this sector. And make no mistake: there are many entering retirement every day due to the aging baby boomer generation.
Recommendations
There have been two very specific recommendations made by the National Consumer Law Center to the Consumer Financial Protection Bureau (CFPB) in recent months:
- Require lenders to assess the borrower’s capacity to pay ongoing charges for taxes and insurance and provide a longer period to repay taxes and insurance advanced by the lender.
- Adopt a rule which prevents younger spouses from being evicted from the property upon the death of the mortgagor spouse.
One of the biggest challenges is the desperation many feel upon retirement when they realize they’re not as financially prepared as they thought. Cash can sometimes be limited while debts are high, especially medical and credit card debt. Many lenders stress the fast solution with little focus on the long term burden and if they fall behind in their property taxes or insurance, they risk foreclosure. Couple that with fixed rate lump sum dynamics, and it’s a disaster waiting to happen.
Consumers should speak with their estate planning lawyers to ensure they understand, in its entirety, the benefits and potential problems a reverse mortgage poses. Their lawyer can often suggest a better solution that protects their estate and their assets while also serving their immediate purposes and needs for cash.
Ellen LaPlante
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