5 New Solutions for Reverse Mortgage Cons and Misconceptions

A reverse mortgage is not a one-size-fits-all product, but it can be a useful way for many people in retirement to offset mounting costs or simply provide an emergency resource by using home equity. However, there have been some perceived cons — downsides — to the product, some of which have raised the attention of consumer watchdogs like the Consumer Financial Protection Bureau (CFPB). A reverse mortgages is not a true mortgage, but a loan against the equity that you have in your home. If eligible, the financial product can be a boon to to retirees in their later years, industry experts say, but it’s important to know the facts. “There are a lot of myths,” Dan Larkin, divisional sales manager with Chicago-based PERL Mortgage, says about reverse mortgages. “Some people think the lender is going to be on the home’s title and will be able to take ownership of the home at some point, and that’s not true.” In a recent Reverse Mortgages Report to Congress, the CFPB laid out five key consumer protection concerns. Here are the reasons why the government has worried about reverse mortgages and how recent policy changes are addressing them. 1. Reverse mortgages are complex products. “The rising balance, falling equity nature of reverse mortgages is particularly difficult for consumers to grasp,” the CFPB says. Consumers’ misunderstanding of the product has led to some its misuse.  It can be difficult to understand how reverse mortgages work. “In all reality, it’s a financial product,” says Lester Tutak, regional reverse mortgage specialist, with PEARL mortgage. “Sometimes the borrower may either go through the money too quickly or too freely, or it may be a situation where they’ve exhausted funds and are now paying taxes and falling [into debt].” The CFPB found that the tools, including federally required disclosures, available to consumers to help them understand prices and risks were insufficient to ensure consumers are making decisions in their best interest. Recent innovation and policy changes have implemented more protections for borrowers, Tutak says. Including a close family member when meeting with a reverse mortgage lender, or other financial advisor when considering a reverse mortgage, can help when deciding whether this is the right tool for you, he says. 2. Reverse mortgage borrowers are using the loans in different ways than in the past. Reverse mortgage borrowers are taking out loans at younger ages than in the past, data show. In 2011, nearly half of borrowers were under age 70. Taking out a reverse mortgage early in retirement, or even before reaching retirement, increases risks to consumers, the CFPB says. “By tapping their home equity early, these borrowers may find themselves without the  financial resources to finance a future move – whether due to health or other reasons,” the CFPB says. But knowing how to use a reverse mortgage appropriately, in addition to other streams of income such as Social Security, can help you stretch your budget significantly, Larkin says. HECM loans are government-funded reverse mortgages, which are the most common type of reverse mortgage. “If you use a HECM [home equity conversion mortgage] from age 62 to 70, instead of taking early Social Security to help cover your living expenses, you actually can get a possible double benefit,” Larkin says. “One, you will receive more in Social Security from age 70 on; and two, it can also allow your retirement funds to grow larger by not drawing from them or by drawing less than you would have without the HECM. “It acts as another financial tool to extend or improve your retirement.”   3. Product features, market dynamics, and industry practices can create risks for consumers. In February of 2012, 9.4% of reverse mortgage borrowers were at risk of foreclosure due to nonpayment of taxes and insurance, the CFPB says, noting that false advertising can lead consumers astray. While the funds drawn through a reverse mortgage can be used for a myriad of purposes — to pay off an existing mortgage, make needed maintenance repairs to the home, or just to have more spending money — it’s important to plan for ongoing property charges that will continue over time. Since the CFPB findings, the Federal Housing Administration has implemented new protections toward ensuring borrowers are able to meet their loan obligations. They’re also working on a financial assessment that will further examine a borrower’s ability and willingness to make their tax and insurance payments as required, expected in late 2014. 4. Counseling needs to adapt as reverse mortgage products change. Funding for housing counseling is granted by the federal government each year, making access to high-quality counseling more difficult, the CFPB says, adding that some counselors may omit some of the required information or speed through the material covered during the counseling session. All borrowers are required to go through a third-party counselor, and lenders are not allowed to participate. One newer counseling protection is requiring non-borrowing spouses to attend. But funding concerns aside, the emphasis on a thorough counseling session has increased over the years, Tutak says. “[Several years ago] counseling sessions were usually 50 minutes, now it’s two to three hours. Counselors are getting down to the meat and potatoes. Every potential borrower has a different situation.” 5. Some risks to consumers appear to have been adequately addressed by regulation, but remain a matter for supervision and enforcement. “The risk of fraud and other scams is heightened for this population,” CFPB says, noting the need for increased regulation on false advertising. It’s important to determine whether it’s the right option for your situation, as not everybody has the home equity to qualify for these loans, Larkin says. And for others, it can change lives. “Reverse mortgages have helped a tremendous amount of people with foreclosure or bankruptcy, or just people looking to have a better quality of life,” Tutak says. Visit the Boldin reverse mortgage resource page for more information about this financial product.