Reverse mortgages, a lifeline for seniors struggling to pay bills in allowing them to turn home equity into cash, are entering into foreclosure at an "alarming" rate, Consumer Financial Protection Bureau Director Richard Cordray said Wednesday.
One out of every 10 seniors with a reverse mortgage is in default or foreclosure, Cordray said in a conference call with reporters on Wednesday timed to coincide with the release of a reverse mortgages report prepared for Congress.
The agency also found that seniors often don't really understand the terms of the loan, a problem exacerbated by deceptive mailings and other advertisements, Cordray said.
"We will work with our partners at the federal, state and local level to root out these kinds of scams," Cordray said. He described one flier that portrayed a reverse mortgage as a "government benefit," which is wrong, and that contained "blatantly false information about loan repayment options." He did not go into further detail about who sends out these notices but said that the agency has authority to ensure that the reverse mortgage market works well for consumers.
Reverse mortgages let homeowners older than 62 borrow against the equity of their home without their having, in turn, to make any loan payments, provided that they stay in the house. This type of mortgage is traditionally structured so that the loan balance will gradually increase over time. Lenders, such as MetLife bank, which is currently the biggest issuer of these loans, then own a greater and greater stake in the property. Borrowers can stay in their home even if the loan balance exceeds the home's value, but they are still responsible for taxes and insurance payments throughout the process. When a borrower dies, the heir of the estate sells off the home and repays the federally insured loan and keeps what is left over.
The loans, however, have been controversial. Historically, reverse mortgages have had high costs and fees relative to traditional loans and consumer advocates have said the benefits may not outweigh the cost. As the CFPB notes in its report, senior citizens are often confused about the terms of the loans, even though a borrower wishing to obtain one of these loans, which are typically federally insured, must first see a qualified housing counselor.
The original purpose envisioned for reverse mortgages was to provide a steady income stream for retirement. But in 2011, 73 percent of such borrowers took a lump sum payment instead. This may be a poor financial decision, according to the CFPB. That's because seniors often don't consider how the interest on this debt will cause their home equity to evaporate more quickly. In other cases, borrowers may be saving or investing the lump-sum proceeds and might be earning less than they are paying in interest, the CFPB said.
More 60-somethings are also taking out reverse mortgages, the CFPB found. This can prove a problem should one of these seniors, who took a lump sum, decide to move elsewhere but learn that he or she is essentially stuck.
The two largest reverse mortgage originators, Wells Fargo and Bank of America, exited the market in 2011. Wells Fargo cited concerns about the reputational risks of foreclosing on seniors as a result of tax and insurance defaults.
New reverse mortgage issues hit a peak in 2008 and 2009, rising to more than 100,000 a year, but have since fallen rapidly to about 70,000 a year. About 582,000 reverse mortgages were outstanding as of November 2011.
But with 32 million baby boomers poised to enter retirement, the market for these mortgages could rapidly grow, Cordray said.