July 12, 2016
A Risky Lifeline for the Elderly Is Costing Some Their Homes
Trusting seniors are being take advantage of by lenders with empty promises and a failure to provide the full explanation of the reality of the fees, property taxes, maintenance cost, and the risk of loans.
The very loans that are supposed to help seniors stay in their homes are in many cases pushing them out.
Federal and state regulators are documenting new instances of abuse as smaller mortgage brokers, including former subprime lenders, flood the market after the recent exit of big banks and as defaults on the loans hit record rates. Some widows are facing eviction after they say they were pressured to keep their name off the deed without being told that they could be left facing foreclosure after their husbands died.
The newly minted Consumer Financial Protection Bureau is working on new rules that could mean better disclosure for consumers and stricter supervision of lenders, which is good news for the baby boomer generation heading towards retirement with dwindling savings. According to the federal government, more than 775,000 of such loans are outstanding.
Concerns about the multi-billion-dollar reverse mortgage market echo those raised in the lead-up to the financial crisis when consumers were marketed loans — often carrying hidden risks — that they could not afford.
“There are many of the same red flags, including explosive growth and the fact that these loans are often peddled aggressively without regard to suitability,” said Lori Swanson, the Minnesota attorney general, who is working on reforming the reverse mortgage market.
While the number of reverse mortgages have declined recently, the rate of default is at a record high — roughly 9.4 percent of loans, according to the consumer protection bureau, up from around 2 percent a decade earlier.
Peter H. Bell, president and chief executive of the National Reverse Mortgage Lenders Association, a trade group, said that he met with officials from the Department of Housing and Urban Development to begin hashing out a way for lenders to adopt a uniform standard to determine whether seniors can afford to take on the loans.
Reverse mortgages can be a valuable tool for seniors to stay in their homes and gain access to money needed for retirement, if used correctly. Seniors with equity built up in their homes can borrow against a percentage of that and withdraw a lump sum or a line of credit. The loan is repaid once the homeowner moves out or dies, but borrowers still have to pay property taxes, maintenance and insurance.
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Brokers earn higher fees on these loans and substantially more money when they sell the loans into the secondary market, where rates close to double those for variable loans, according to rate sheets obtained by the consumer bureau.
Some 70 percent of reverse mortgages are taken in lump sums, up from 3 percent in 2008, according to the bureau. When seniors use the money to pay off other debts, especially right before retirement or early into it, that can leave them with scarce resources to pay their property taxes and insurance, left with nowhere to go.