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USA: Reverse mortgages pose risks for older consumers

08 Dec 2010

Consumers Union (CU) recently released the results of a study into the growing market for reverse mortgages. Finding these products come with big risks and high costs for older consumers, CU is calling for stricter oversight of market and stronger consumer protection for borrowers.

Reverse mortgages allow home-owners in the US aged 62 years old and above to release some of the equity in their home in order to supplement their earnings in retirement with cash payments or lines of credit. The loan is normally repaid with proceeds from the sale of the home after the borrower dies or moves into care.

But reverse mortgages are a complex financial product, and CU's report raises concerns that increasing numbers of older consumers are being misled into squandering their main financial assets prematurely and risk losing their homes.

"Reverse mortgages are a very risky deal for borrowers who don't understand the complicated terms of the loan and how quickly fees and interest charges can add up," said Norma Garcia, Senior Staff Attorney at CU. "Reverse mortgages should only be a last resort for seniors who want to stay in their homes and have no other alternatives to supplement their income."

Older consumers were found to be the target of misleading marketing of these products, as well as aggressive cross promotion of other financial products that were often unsuitable. CU also notes that reverse mortgages are being increasingly promoted to consumers other countries in including India, Taiwan, Australia, Canada and the UK.

The report, entitled Examining Faulty Foundations in Today's Reverse Mortgages, was jointly undertaken with California Advocates for Nursing Home Reform and the Council on Aging Silicon Valley. The authors have made a number of recommendations to reform the market:

Ensure loans are suitable for borrowers Lenders and brokers should be required to consider whether the loans put borrowers at risk of losing their homes, if the borrower understands the complex nature of the contract, and if there are more viable alternatives available to the borrower.

Establish a fiduciary responsibility for the loan Lenders and brokers must be required to act in the best interests of the borrower and should be held liable for violating this fiduciary duty.

Outlaw deceptive marketing All reverse mortgages should be required to include information to help borrowers determine whether the loans are suitable for them.

Adopt stronger prohibitions on cross promotions Prohibitions against cross promotions of other financial products by lenders and brokers should extend to non-HECM (Home Equity Conversion Mortgage) loans. Insurance agents and brokers should be held liable for selling an annuity when it is purchased with reverse mortgage funds.

Strengthen the quality and content of counselling HUD (US Dept. of Housing and Urban Development) counsellors should be required to hold an in-person session with prospective borrowers to determine whether a reverse mortgage is suitable for the borrower. The counsellor should deny a counselling certificate to the borrower if the loan is not in the best interest of the senior.

Protect non-borrowing spouses and tenants Spouses and tenants whose names are not on the reverse mortgage loan should be notified about their limited rights to remain in the home after the borrower dies or permanently moves out of the home.

CI is calling for the G20 take action to strengthen financial consumer protection. See Consumers for Fair Financial Services to find out more.