In recent years T.V ads about reverse mortgages surfaced targeting those aged 62 and over. The ads promised “retirement your way” and “true financial security”. Some even pitching reverse mortgages as “free money”. Reverse mortgages, also known as HECM loans, are backed by the Federal Housing Administration and are similar to home equity lines of credit, but instead of paying a monthly payment, repayment is deferred until the homeowner leaves the home, dies or fails to maintain the property, pay homeowners insurance or property taxes. The borrower in some cases can take a lump sum payment upfront and while there are no required monthly payments on a reverse mortgage, the upfront fees, interest and closing costs can be much higher than home equity loans. The interest is added to the loan balance each month, and so the rising loan balance can grow to exceed the value of the home.
In June of 2012, a report to Congress by the Consumer Financial Protection Bureau, mandated by the 2010 Dodd-Frank financial overhaul, highlighted some growing problems with reverse mortgages. While reverse mortgages are increasingly being used as a tool in retirement planning, they still come with risks that can cause serious problems for unsuspecting borrowers. Some retirees are discovering that after the lump-sum payout money is gone, they can no longer afford the property taxes, insurance and upkeep for their home. When this occurs, many of those aged 62 and over face foreclosure.
The report highlighted that many borrowers fail to understand that even after the money is gone, the balance on the loan is still rising and eating away at any remaining equity in their homes.
In the report CFPB also noted that in the 12 months ended September 2011, of borrowers who took out a HECM loan, 73% took all or almost all of their funds upfront. This is a rise of 30 percentage points since 2008. A substantial increase. The reason for this could be that while most HECM reverse-mortgage options carry adjustable rates and offer a line of credit or annuity-like payouts over time, the sole fixed-rate HECM choice is available only with a lump-sum payout and many people prefer fixed rates.
While the loans represent a small corner of the national mortgage market, with only about 2% to 3% of eligible households using them, according to the CFPB, studies show demand is growing, according to data by Reverse Market Insight. This will increase the current pool of 580,000 currently outstanding.
There are fears that many seniors could fall victim to the aggressive marketing tactics and abuse by those pushing the product, however there has been a report of high satisfaction from consumers who have used reverse mortgages. Moving forward, better education and counseling for those taking out the loans is required to ensure that those who take advantage of this product reap the full benefit of it.
Michael Hobbs, SRA, LEED GA, PahRoo Appraisal & Consultancy
Twitter @Pahroo
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