The number of reverse mortgage originations is poised to gain more popularity in coming years with the retirement of the “baby boom” generation, which typically has more home equity than retirement savings.
But complaints are also mounting about those complex reverse mortgage terms and consequences — including unexpected expenses, quickly diminishing home equities and the rights of family heirs, who are often left out of the process. There are also issues with servicer runarounds and foreclosures.
The U.S. Consumer Financial Protection Bureau Monday released a report chronicling 1,200 reverse mortgage complaints received at the Bureau between December 1, 2011 (when the agency started accepting these complaints) and December 31, 2014.
Studies have estimated that among Americans 55 to 64 years old, 41 percent have no retirement savings account. But a majority of them, about 74 percent, own their homes and have built up good equity. The most common ways for consumers to access this home equity is to refinance their original mortgage, take out a home equity loan or line of credit, sell the home and downsize, or obtain a reverse mortgage.
But its the reverse mortgage which is being promoted more widely to senior homeowners, especially on television commercials.
“Consumer complaints tell us that the complex terms of reverse mortgages continue to be misunderstood,” said CFPB Director Richard Cordray. “As more baby boomers choose reverse mortgages to tap into their home equity, they need to understand the unique terms and features of this product. Our advisory can help those who have already chosen reverse mortgages to plan ahead for loved ones.”
For the Bureau, reverse mortgage complaints comprised about 1 percent of all mortgage complaints, by all ages, during the 2011-2014 time frame. And while reverse mortgages are only available to people over the age of 62, only about 42 percent of the complaints were from consumers who described themselves as 62 or older. The remaining consumers likely included the younger spouses or family members of borrowers.
Many consumers struggle with understanding how quickly their loan balance will go up and their home equity will fall. According to the CFPB, the top complaints about reverse mortgages included:
Distress about the inability to add new borrowers to an existing loan: Reverse mortgages prohibit spouses, heirs, and dependents from taking over the loan. This is 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. This can be a problem for surviving spouses and children. Family members complained to the CFPB about not being able to be added to the loan so they could keep the home.
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 servicers do not provide a clear process to allow them to settle the debt. Consumers also complained about appraisal delays, improperly performed appraisals, and inflated home values so they would have to pay more. Others complained about a lack of response from loan servicers, including unanswered calls, and a lack of response to written requests.
Struggles with foreclosure due to issues 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. A previous CFPB report found that nearly 10 percent of reverse mortgage borrowers are at risk of foreclosure because they have failed to pay these expenses. Consumers who complained to the CFPB described unsuccessful attempts to halt foreclosure proceedings by paying overdue taxes. Others insisted that their loan servicers had determined incorrectly that their taxes were overdue. Sometimes these inaccuracies were due to a failure by loan servicers to keep accurate records.