15 November 2018

Reverse Mortgages in the Hot Seat Again

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As more and more boomers reach retirement age, the need for them to create retirement income will become more acute. This is especially true for the 41 percent of Americans between the ages of 55 and 64 who have no retirement savings at all. Without funds stashed away, many will turn to their home equity to produce income, either by refinancing their original mortgage, taking out a home-equity loan or line of credit, selling their home and downsizing, or obtaining a reverse mortgage.

The latter option seems logical, yet for years consumers have been mystified by these offerings, and their advisors have had a love hate relationship with them. So it’s not surprise the reverse mortgage market is only 1 percent of the traditional mortgage market, with 628,000 outstanding loans. And growth may not come easy, since the Consumer Financial Protection Bureau (CFPB) recently release a report indicating the top complaints consumers file about reverse mortgage: loan terms, servicer runarounds, and foreclosure problems.

Seniors watch a third more TV than other adults, and every time they turn on the set there's a good. To this end, CFPB has produced a new consumer advisory that highlights three ways that borrowers can protect their heirs once the loan comes due. As for complaints, CFPB says its study revealed a big disconnect between consumer expectations and how reverse mortgages actually work. For example, the top three complaints included:

1. Distress about the inability to add new borrowers to an existing loan 

Reverse mortgages prohibit spouses, heirs, and dependents from taking over the loan because loan amounts are, in part, calculated using a borrower’s age and the loan repayment is triggered when the last borrower moves out or dies.

2. Frustration with runarounds when trying to pay off the debt 

When the borrower dies, heirs can sell the home, repay the loan balance, or pay 95 percent of the property’s assessed value. Consumers complained that loan services do not provide a clear process to allow them to settle the debt and that appraisal delays, incorrect appraisals, and inflated home values increased their payments.

3. Struggles with foreclosures due to problems with property taxes and homeowners insurance 

Reverse mortgages require no monthly mortgage payments, but borrowers are still responsible for property taxes and homeowner’s insurance. Consumers sometimes fail to pay these expenses and get threatened with foreclosure. But their efforts to get caught up sometimes fail to halt the foreclosure process.

Guidance from the National Ethics Association: If you are involved with home equity conversions, obey the letter of law regarding Federal Housing Administration (FHA) regulations, comply with all loan suitability provisions, and make sure your clients fully understand the workings of these complex arrangements. Doing your homework up front will prevent compliance and errors-and-omissions headaches down the road, not to mention a retirement nightmare for your clients.

Click here to access the full article on LifeHealthPro.com

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