The Consumer Financial Protection Bureau released a report highlighting the risks for consumers on reverse mortgages, noting consumers remain confused about the product.
The bureau, which conducted the study as a requirement of the Dodd-Frank Act, found that few consumers completely understand how reverse mortgages work. It also announced an "RFI" to gather public input regarding reverse mortgages.
“Reverse mortgages are complex and have the potential to become a much more pervasive product in the coming years as the baby boomer generation enters retirement,” said CFPB Director Richard Cordray. “With one in 10 reverse mortgages already in default, it is important that consumers understand what they are signing up for and that it is the right product for them.”
A reverse mortgage allows older homeowners to access the equity they have built up in their homes and defer payment of the loan until they die, sell, or move out. They require no monthly mortgage payments, but borrowers are still responsible for property taxes and homeowner’s insurance. Still, the CFPB said 10% of reverse mortgage borrowers are at risk of foreclosure because they have failed to pay taxes and insurance.
The original purpose of reverse mortgages was to enable older homeowners to convert home equity into an income stream to use in retirement.
The bureau’s request for information seeks feedback on what factors are most important in deciding whether to take out a reverse mortgage and how consumers choose between lenders.
The CFPB also found that consumers are getting reverse mortgages at younger ages. The most common age for a new borrower is 62 — the first year of eligibility. The bureau is looking for feedback as to why borrowers typically pay off their loans before they die and how those borrowers finance a later move with less equity.
According to the CFPB study, 70% of borrowers are taking out the full amount of proceeds as a lump sum rather than as an income stream or line of credit. This raises concerns that consumers who take out all of their accessible home equity upfront will have fewer resources available later in life. They may not have the money to continue to pay taxes and insurance, which can put them at risk of losing their home.
Borrowers who save or invest the proceeds may be earning less on the savings than they are paying in interest on the loan. The CFPB is seeking feedback on what borrowers do with their lump sum payments.
The CFPB also said consumers may be receiving deceptive and misleading marketing that tout reverse mortgages as a government benefit or entitlement program like Medicare.
The new array of product choices in the reverse mortgage market also make a housing counselor’s job much more difficult, the bureau said. Counselors need improved methods for helping consumers better understand the complex tradeoffs they need to make in deciding whether to get a reverse mortgage.
The bureau said it will use the information from the study and the RFI to inform future policy and disclosure decisions on reverse mortgages.
The request for information was submitted to the Office of the Federal Register on June 26. Comments will be due 60 days after publication.