Forbes: Defining the Risks of a Reverse Mortgage

Some of the biggest risks inherent in a reverse mortgage transaction include the complexities of the Home Equity Conversion Mortgage (HECM) Program allowing for instances of misunderstanding, problems that can arise when someone is unable to pay, and inaccurate perceptions concerning what the loan repayment structure looks like. This is according to Dr. Wade Pfau, professor of retirement income at the American College of Financial Services, in a new piece at Forbes.

“When discussing reverse-mortgage risks, the first matter to emphasize is that many of the commonly mentioned risks involve misunderstandings on the part of borrowers or heirs about how the program works,” Pfau writes.

Citing two 2015 reports authored by the Consumer Financial Protection Bureau (CFPB) that detailed associated risks and complaints with the HECM program, the first report – titled “Snapshot of Reverse Mortgage Complaints: December 2011–December 2014” – revealed that officially-registered complaints relating to the HECM program were neither more common, nor did they occur at a higher level than those recorded in connection with traditional mortgages.

“For the three-year period investigated, reverse-mortgage complaints represent about 1 percent of the mortgage complaints received by the CFPB and that the reverse-mortgage market size is about 1 percent of the total mortgage market,” Pfau writes. “Thus, there is not a disproportionate number of complaints about reverse mortgages.”

Many of the complaints concerning the HECM program discussed in the agency’s report stem from some kind of misunderstanding about the intricacies of the program, Pfau writes. However, this can be helpful in some respects.

“These complaints do allow us to reflect again on some of the complicated features of the HECM program and the misunderstandings they may generate,” Pfau writes.

38 percent of recorded reverse mortgage complaints in the CFPB reports revolve around problems that arise when someone is unable to repay the loan, which can include a borrower’s desire to refinance when their home equity is insufficient to do so, Pfau explains. Borrowers also complain about an inability to add new borrowers to their loans, including adult children and non-borrowing spouses.

“Due to the actuarial nature of the program and how the principal limit factors are determined, it should be clear to readers that these types of requests are not allowed and not reasonable,” Pfau writes. “Having more younger borrowers added to the loan would increase the time to loan maturity and would require a lower initial principal limit factor than already provided.”

Pfau also details some of the misconceptions consumers have about reverse mortgages that were discovered in the CFPB’s 2015 report, “A Closer Look at Reverse Mortgage Advertisements and Consumer Risks.” Some of those misconceptions include not understanding that a reverse mortgage would have to be repaid in the future, that there are fees or interest involved in reverse mortgage transactions, and belief that an FHA-insured HECM was more akin to a welfare program administered by the federal government as opposed to a loan.

Read the full article at Forbes, sourced from Pfau’s book “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement.”

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