The Consumer Financial Protection Bureau has prepared a report for Congress over the state of reverse mortgages in the country. The CFPB is concerned about reverse mortgages having a harmful effect on seniors who borrow them against the equity in their homes during retirement.
High default rate worries CFPB about reverse mortgages
Reverse mortgages allow retirees or soon-to-be retirees to realize a benefit of the equity they hold in a home, one of the few ways one can do so. Only available to those 62 years of age or older, they are essentially loans against the value of the property, according to the Federal Trade Commission, and usually are paid to the owner in a lump sum, or in monthly installments for a set number of years or for as long as the occupant remains in the home.
However, according to the Huffington Post, the Consumer Financial Protection Bureau has become concerned with reverse mortgages and how they might be affecting seniors, especially given a higher default rate. Director Richard Cordray is presenting a report to Congress soon to discuss the issue.
Almost 10 percent face default
According to the Wall Street Journal, borrowers can fall into default and face foreclosure if they fail to pay for insurance, property taxes or maintain the residence while in the home. Borrowers also must use the home as their primary residence; payments are due if the occupant leaves. The CFPB is concerned, as roughly 10 percent of reverse mortgage borrowers are at risk of default.
New reverse mortgages are beginning to tick up slightly, according to the Huffington Post, they have fallen somewhat out of favor. In 2008 and 2009, about 100,000 new reverse mortgages were taken out per year, falling to about 70,000 per year in 2010 and 2011.
Overall, according to the Wall Street Journal, less than 3 percent of eligible homeowners take out the loans, though it is still a $90 billion industry. The CFPB is also concerned that “Baby Boomers” are beginning to retire, meaning more are likely to be taken out in coming years.
Some benefits but some catches
Reverse mortgage loans, unlike home equity lines of credit, don’t have to be paid back except in certain circumstances. Payments come due if occupants move out of the home or sell it. The potential borrower has to receive counseling prior to receiving the funds, according to the FTC, and if approved, receives the money as a lump sum, monthly payment or a line of credit they can draw from at their leisure. Lump sums, according to the Wall Street Journal, are taken by 70 percent of borrowers. The loan can end up being for more than the home is worth.
A constant criticism, according to the Huffington Post, is that many seniors don’t actually understand terms. Some lenders also don’t make it clear that the surviving children and spouse of a borrower have the right to buy the home at the appraised value if the occupant dies, according to Fox Business. Lenders not alerting people to these rights led to a lawsuits by the AARP against Wells Fargo, Fannie Mae and the Department of Housing and Urban Development.
Wall Street Journal: http://online.wsj.com/article/SB10001424052702303822204577464522507162522.html
Fox Business: http://www.foxbusiness.com/personal-finance/2011/08/05/aarp-sues-wells-fargo-fannie-mae-over-reverse-mortgage-doreclosure/