Reverse mortgages are loans that provide supplemental income to seniors 62 and older based on the value of their homes. A reverse mortgage does not need to be repaid until the homeowner sells the property, moves or passes away.
But the loans that were intended to help retired homeowners maintain their lifestyle in their current homes are not risk-free and homeowners must think carefully before considering a reverse mortgage.
Several disturbing trends have emerged in this market recently, prompting concern from experts, regulators and advocates. Here are five:
No. 1: Younger borrowers are choosing reverse mortgages
Reverse mortgages are designed for elderly homeowners to "age in place." Meaning, reverse mortgage funds are designed to allow older homeowners to remain in their properties until they pass away or need to move to an assisted-living facility. The younger you are, the less equity available to aid you through your retirement years.
The average age of reverse mortgage holders has been steadily falling. According to a detailed reverse mortgage report by the U.S. Housing and Urban Development Agency, the average age in 1990 was 76.7 years old. By 2012, the last year this particular data set was collected, the average had dropped to 71.9 years of age. Homeowners as young as 62 years old can get reverse mortgage loans.
"The concern is: what will you have to fall back on when you are in your 70s, 80s and 90s," says Lori Trawinski, a senior strategic policy adviser at AARP Public Policy Institute. "People are living much longer than they ever expected to. There's a belief that people will eventually have to use home equity to fund their longevity, but at what point is it best to do that?"
No. 2: Borrowers are taking all the money at once
There's been a rise in reverse mortgage borrowers taking a "lump sum" payment option, versus monthly installments or a line of credit. One Consumer Financial Protection Bureau study, from 2011, found nearly three-quarters of borrowers received their money all at once.
This can seem like a windfall for cash-strapped retirees but requires a deep understanding of the fine print to be safe. For one, fixed interest on a lump sum is folded into the loan and still compounds over time. Further, borrowers may not realize even after they use up all the lump-sum proceeds, they still need to pay for property taxes, insurance and maintenance.
Younger borrowers, in particular, may deplete the value of their home equity so it may not be available when needed. Aging seniors are likely to have unforeseen health expenses or may someday need to move to an assisted-living facility that they will no longer be able to afford.
No. 3: The largest lenders have left the market
The exit of MetLife, Bank of America, Wells Fargo and Freedom Financial has allowed smaller lenders to enter the fray. The CFPB warns that many of these smaller lenders are "not depository institutions."
"The changing economic and regulatory landscape faced by these small originators creates new risks for consumers," wrote the CFPB in a report to Congress.
(See a selected group of current reverse mortgage lenders)
No. 4: Questionable marketing practices
Aggressive marketing practices and celebrity endorsements have prompted some to call these tactics into question. A recent Consumer Financial Protection Bureau study found widespread misunderstanding among average Americans after viewing advertisements about reverse mortgages, also referred to as Home Equity Conversion Mortgages. The Bureau called this confusion a "major risk" for older homeowners.
No. 5: Heirs unaware of obligations
A new law in 2014 fixed at least one major issue with reverse mortgage loans, which was to give a "non-borrowing" but surviving spouse the right to assume ownership and continue on as the borrower did, provided they live in the home and can keep up with related financial obligations, such as taxes as insurance. Prior, the loan was due upon the death of the borrower.
That change did not affect how surviving heirs are treated. In some cases, children have been unaware how quickly foreclosure proceedings can begin once both borrowers pass on. Typically heirs will have six months to make decisions about the loan, which is to pay off the balance or 95% of appraised value, whichever is less. Extensions are available, so survivors eager to keep their parents' home should pay close attention to their rights in this situation.
Where You Can Go for Help
The Federal Trade Commission offers these resources for anyone consider a reverse mortgage. If you believe you have been a victim of fraud, the FTC encourages you to file a complaint with the Federal Trade Commission, your state Attorney General’s office, or your state banking regulatory agency.
More information on reverse mortgages:
U. S. Department of Housing and Urban Development (HUD)
Consumer Financial Protection Bureau
1-855- 411-CFPB (1-855-411-2372)