What is reverse mortgage?

Reverse mortgages have become a popular, albeit contentious, option for elderly homeowners to obtain cash by leveraging the equity in their homes to secure a loan. It is projected that reverse mortgages would increase as the American population ages. However, these mortgages are dangerous products that the target consumers—older individuals who sometimes live on a low income—may not fully grasp. As a result, regulators require lenders to offer specific disclosures to those who apply for a reverse mortgage.

One of the critical challenges with reverse mortgages is the complexity of the terms and conditions associated with these loans. Many elderly borrowers, who may not have extensive financial literacy, find it difficult to understand the implications of interest rates, loan fees, and the long-term impact on their estate. This lack of understanding can lead to borrowers making uninformed decisions that may not align with their financial goals or needs. As such, there is a growing call for more comprehensive educational resources and counseling services to help potential borrowers navigate the intricacies of reverse mortgages.

However, providing disclosures does not preclude the risk of predatory or misleading financing. Some advocacy groups, such as Consumer Advocates Against Reverse Mortgage Abuse (CAARMA), argue that the federally supported reverse mortgage framework should be overhauled because the loans frequently result in negative effects. In particular, they contend that "thousands and thousands of heirs are prevented from satisfying the reverse mortgage loan," resulting in lost inheritances, and that half of surviving non-borrowing spouses will be unable to remain in their home once the borrowing spouse passes away.

Moreover, the emotional and psychological impact of reverse mortgages on borrowers and their families is often overlooked. The decision to take out a reverse mortgage can be fraught with stress and anxiety, particularly for those who are concerned about leaving a financial legacy for their heirs. The potential for family disputes over the repayment of the loan and the future of the family home can add to the emotional burden. It is essential for borrowers to have open and honest discussions with their family members and financial advisors to ensure that everyone involved understands the potential consequences of a reverse mortgage.

Reverse mortgage lenders cannot do some things, but they must do others. Federal rules prohibit reverse mortgage lenders from engaging in "unfair or deceptive" tactics. Section 5 of the Federal Trade Commission Act, for example, covers reverse mortgages. It is not allowed to lie to or mislead potential borrowers about the terms of a reverse mortgage loan. Lenders are also not permitted to utilize the Federal Housing Administration (FHA) emblem or to falsely represent that their services are government-provided.

In light of these regulations, there is a pressing need for more stringent enforcement mechanisms to ensure compliance among lenders. While federal and state laws provide a framework for protecting consumers, the effectiveness of these laws is contingent upon rigorous oversight and enforcement. This includes regular audits of lending practices, penalties for non-compliance, and a clear process for borrowers to report and resolve grievances. Strengthening these enforcement measures is crucial to safeguarding the interests of vulnerable borrowers and maintaining the integrity of the reverse mortgage market.

In addition, under Regulation Z of the Truth in Lending Act (TILA), lenders must disclose specific disclosures to customers who apply for a reverse mortgage. This includes:

A notice that just because you apply for a reverse mortgage does not obligate you to proceed, even if an application has been signed. A good faith estimate (GFE) is a form provided by the lender to clarify the basic terms of the loan. It is intended to help you obtain a feel of how much the loan will cost or to compare lenders.

An itemized description of the loan's charges, terms, home appraisal values, and the age of the youngest borrower. An explanation of the rates for total annual loan cost (TALC). The table shows the annual percentage cost of a reverse mortgage based on preset loan durations and expected annual housing appreciation, as explained in the TALC calculations.

There are also state statutes that safeguard reverse mortgage consumers. According to Amy Loftsgordon, an attorney with Nolo, states have gradually begun to establish laws to protect elderly people from deceptive advertising. For example:

Maryland has mandated that lenders provide a checklist to prospective borrowers advising them to contact a reverse mortgage counseling organization.

Washington requires that potential borrowers receive a statement that follows certain rules, informing them that they must seek counseling before obtaining a reverse mortgage.

California imposes a statutory seven-day "cooling off" period. After completing the necessary counseling session, a potential borrower must wait at least seven days before the lender can charge costs.

Despite these protections, there is still a significant gap in the public's understanding of reverse mortgages. Media campaigns and community outreach programs could play a vital role in bridging this gap by providing accessible and relatable information about the benefits and risks of reverse mortgages. Such initiatives could empower seniors to make more informed decisions and reduce the likelihood of them falling prey to unscrupulous lenders.

Defaults on reverse mortgages may be increasing. According to a 2019 Government Accountability Office (GAO) report, a growing number of home equity conversion mortgages (HECMs), the most frequent type of reverse mortgage and the only type that is federally backed, have gone into default. According to the report, HECM defaults increased from 2% of loan terminations in 2014 to 18% by 2018. The research stated that this was primarily due to debtors failing to meet occupancy standards, as well as pay taxes and insurance.

The GAO study also identified multiple flaws in the FHA program that regulates HECMs, emphasizing the need for more oversight to ensure that loan servicers fulfill rules, especially those designed to safeguard borrowers.

Litigation may also be escalating. Lawyers in several states, including West Virginia, have observed an increase in consumer litigation for reverse mortgages in recent years.

Outside the sector, it is unclear what percentage of lending is dishonest, while anecdotes of unscrupulous lenders abound. A 2019 study published in USA Today, for example, claimed that almost 100,000 loans were foreclosed in a "stealth aftershock of the Great Recession," decreasing property values in entire areas across the United States—mostly underprivileged, urban, and black. The probe was contentious among the reverse mortgage business.

Do Reverse Mortgages Affect Your Heirs?

It surely can. A borrower's death can trigger repayment of the reverse mortgage. Your successors will be required to repay either the loan balance or 95% of the home's appraised worth, whichever is smaller. Your heirs have 30 days after receiving a notification from the lender to do so or give up the residence.

What is Prohibited in Reverse Mortgage Advertising?

Lenders cannot claim that their products are co-signed or otherwise endorsed by the federal government, nor may they use official government emblems.

How are Reverse Mortgages Repaid?

A reverse mortgage is frequently repayable with proceeds from the sale of the home.

Reverse mortgage lenders must make certain disclosures to borrowers as required by federal and state law. The disclosures are intended to educate the borrower about reverse mortgages and the process surrounding them, and at the state level, they frequently include a notification that the borrower will be required to undergo some type of counseling. (Counseling is also required to obtain a federally supported HECM loan). Notably, consumer groups and lawyers warn that reverse mortgages can be fraught with hidden costs and misleading methods, making them unsafe for older people trying to borrow against the equity in their houses.