Reverse Mortgage Could Become a Fiasco for Senior Citizens
David Lereah, Real Estate Economy Watch
Vice President Joe Biden speaks with audience members after speaking on health care reform to a group of senior citizens at Leisure World in Silver Spring, Maryland on September 23, 2009. UPI/Kevin Dietsch | Enlarge Senior households may become the next group of consumers harmed by irresponsible marketing and selling practices according to a report released by a major consumer organization released yesterday.
The National Consumer Law Center cautions that reverse mortgages may become the next consumer fiasco similar to the subprime credit crisis. Reverse mortgages are loans aimed at homeowners who are at least 62 years old. In a reverse mortgage, the homeowner receives either monthly payments or a bulk payment out of the available equity in the home from the lender which increases the debt on the property each month. The homeowner makes no payments and all interest is added to the lien on the property. The funds received by the homeowner do not have to be repaid as long as the homeowner resides in the home.
For senior citizens who have been living in their home for a long time and have little monthly income and have no plans to move, reverse mortgages are an attractive option to get some cash (usually on a monthly basis) to live on. During the lending period, the homeowner lives in his or her own home, retains title to the property, and makes no mortgage payments. In many cases, senior households use the monthly income from a reverse mortgage to pay for healthcare insurance, medical expenses, home repair and vacations. But when the homeowner moves, sells the home or dies, the loan is due in full, including interest and fees—that is how the lender makes money.
The report asserts that some brokers, who are given financial incentives to sell the loans, may be making misleading claims to potential customers. These types of abuses were prevalent during the subprime crisis several years ago. In a report issued by Senators’ Herb Kohl (a Wisconsin Democrat) and Claire McCaskill (a Missouri Democrat) this past June, it was alleged that some lenders falsely represented reverse mortgages as "lifetime income" and also sold these mortgage loans combined with other financial products such as annuities. Congress banned cross-selling reverse mortgages in 2008.
The loan limit on reverse mortgages is currently $625,000; origination fees are capped at $6,000. According to the Housing and Urban Development Department, HUD, reverse mortgages tapped over $17 billion last year.
Yesterday’s report raised a lot of eyebrows in Congress as well as in the financial marketplace because of the vulnerability of senior citizens. Reverse mortgages are complicated financial instruments and most senior citizens have difficulty understanding the detailed explanation of how these mortgage vehicles work and are particularly dependent upon the explanations of brokers who are aggressively trying to sell the product.