Reverse mortgages have come under fire again, in a cautionary assessment from the National Consumer Law Center. A reverse mortgage provides money to senior homeowners in exchange for the equity in their primary residences, and allows them to continue to live in their homes as long as they wish without needing to make additional mortgage payments. Reverse mortgages are complex, can carry steep fees, and need to be carefully evaluated.
[See Will More Reverse Mortgages Mean More Fraud?] The products have not been heavily used to date. Beyond sporadic reports of abuse, there is no compelling public record that seniors are being exploited. But the Law Center report says their rising popularity makes them, and senior homeowners, an increasingly attractive target for unethical brokers. Equating reverse mortgages with the widespread abuses in subprime mortgage lending, the report says existing consumer safeguards for reverse mortgages must be greatly strengthened and receive more funding to guard against a similar meltdown.
"Outright criminal conduct represents the extreme example of bad broker behavior," says the Center's report, Subprime Revisited. "More often, however, brokers take advantage of seniors in less obvious ways, such as by selling them reverse mortgages that they do not need or getting them into more costly loans that increase the brokers’ own compensation."
The report does not present much data to support its allegations. It rests its case mostly on concerns for potential abuse. Also, it points to marketing campaigns from some reverse mortgage companies touting the products as a way to afford luxury items and other big-ticket consumer purchases. While people are free to use their home equity however they wish, most financial experts recommend reverse mortgages be used as conservative tools to pay for necessities while allowing people to remain in their homes. Older consumers, the Law Center fears, are ripe to be exploited: "Seniors, especially those with low incomes, are hard-pressed to find knowledgeable and trustworthy advisors. On the other hand, they can expect to receive lots of encouragement to take out reverse mortgage loans. Unfortunately, much of that encouragement comes from a cast of characters eerily familiar from the subprime mortgage boom and bust: aggressive brokers eager to rake in large fees and giant financial institutions hungry for profits that come from maximizing loan volume. In an effort to generate a steady stream of borrowers, seniors are likely to be pushed into reverse mortgages that they do not need. Without adequate borrower protections, the securitization of reverse mortgages and the push for greater loan volume could lead to abusive lending that will sap the equity of senior homeowners."
Nearly all reverse mortgages occur in the federally insured Home Equity Conversion Mortgage program. It does mandate consumer counseling and disclosure to consumers of all loan fees. Its administrator, the Federal Housing Administration, has not reported widespread abuses in the program. However, the Law Center report cites a Government Accountability Office review of industry practices that found numerous problems with the counseling program, and says these shortcomings would become worse with any meaningful increase in the volume of reverse mortgages.
Reverse mortgages can be an appropriate and helpful tool for many homeowners. And concern about possible abuse of another asset class is a bit over the top at this time, if understandable. But there is no harm in being very careful about any meaningful financial transaction. And what is more meaningful than a decision to tap home equity, which for most people is their largest financial asset?
So, please do your homework. There is a small private market for non-HECM reverse mortgages. I'd avoid the private market unless the home involved was valued in excess of HECM loan ceilings, and I had solid financial and legal advisers to help me negotiate the deal. Check out the HECM website to make sure you understand the program. Talk with friends and family members about whether a reverse mortgage makes sense. Check out fees from multiple reverse-mortgage companies. And do not sign any document—EVER!—that you do not fully understand.