Consumer Federation of California

Update: AB 553 has been made into a 2-year bill.

The commercials make it look enticing: Get cash now, go on a cruise, pay off your debts, and enjoy the good life. It’s easy. Just get a government-insured reverse mortgage. But what they don’t make clear is that a reverse mortgage is debt ‘ and one of the most expensive forms of credit available.

For those with few assets, a reverse mortgage can seem like a lifesaver. Used correctly, reverse mortgages can be a valuable tool for seniors to stay in their homes and access money needed for retirement or to pay hefty medical bills. People who are at least 62 years of age who have built up equity in their homes can borrow against a percentage of the equity, eliminate their monthly mortgage payment, and either take out a lump sum payment or a line of credit. The loan doesn’t have to be repaid until homeowners move out or die, but borrowers still have to pay property taxes, maintenance, and insurance.

At the same time, reverse mortgages are costly with high fees and interest charges, and often have been sold by salespeople who aggressively push inappropriate financial products on uninformed and unsuspecting senior homeowners. Some lenders have used deceptive marketing and sales tactics that include pressuring for quick decisions, glossing over important information, or appealing to an elder’s sense of trust. They may promise that the loans are ‘free money’ to finance vacations and luxuries, without clearly explaining the risks.

Unfortunately, borrowers are putting their savings at risk by increasingly taking out reverse mortgages at younger ages and in lump sums. According to a Consumer Financial Protection Bureau (CFPB) report, in 2011, 73% of borrowers took all or almost all of their available funds upfront at closing. Borrowers who withdraw all of their available home equity upfront will have fewer resources to draw upon to pay for everyday and major expenses later in life. Borrowers who take all of their money upfront are also at greater risk of becoming delinquent on taxes and/or insurance and ultimately losing their homes to foreclosure.

Other issues surface with reverse mortgages. Brokers may earn more money when they make larger loans with the older spouse as the only borrower. Some widows have been evicted after they had been pressured to keep their name off the deed – to make their older spouses the sole borrower on the loan – without being told that they could be left facing
foreclosure after their spouse died.

When a borrower dies or moves out, the loan must be repaid. The borrower’s family has the option of keeping the home by paying off the balance due or by selling the home and using the proceeds to pay off the reverse mortgage. Surviving family members and heirs may lose the home.

For low-income seniors who rely on public benefits, a reverse mortgage might make one ineligible for services such as food stamps and Medicaid or Supplemental Social Security Income.

Seniors often do not fully understand what they are getting into and are rushed into a decision. Mandatory counseling, which has been a part of the reverse mortgage program since its inception, is intended to counter these concerns. However, counseling itself has not always been effective.

Because reverse mortgage decision-making involves a number of complex issues, before committing to a loan, every senior should contemplate possible negative consequences. Seniors need to be aware of the potential downsides of these products that may make them unsuitable for a senior’s needs and long-term financial objectives.

Consumer Federation of California and California Advocates for Nursing Home Reform are co-sponsoring AB 553 (Medina), which would require that a senior applying for a reverse mortgage will receive a copy of a pre-counseling self-evaluation worksheet seven days prior to the required counseling session. The prospective borrower will be advised to complete the worksheet prior to the in-person or telephone counseling session and encouraged to discuss suitability issues with the counselor during the session.

AB 553 would help ensure that seniors understand the reverse mortgage before signing a contract.