You’ve probably seen them on late night cable TV channels: Older celebrities advising seniors to seriously consider reverse mortgages as a product that will ease financial worries in their retirement years.
But the U.S. Consumer Financial Protection Bureau Wednesday issued an advisory warning consumers that many reverse mortgage ads do not tell the full story.
“As older consumers consider reverse mortgage loans to tap into their home equity, they need to be careful of those late night TV ads that seem too good to be true,” said CFPB Director Richard Cordray. “It is important that advertisements do not downplay the terms and risks of reverse mortgages or confuse prospective borrowers.”
Confusion surrounding reverse mortgages is not new and it will only intensify in coming years with the retirement of the “baby boom” generation, which has more home equity than retirement savings.
Studies have estimated that among Americans nearing retirement, 41 percent have no retirement savings account. But a majority of them, about 74 percent, own their homes and have built up good equity, says the CFPB.
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.
In a reverse mortgage, older homeowners can access the equity they have built up in their homes and defer payment of the loan until they pass away, sell, or move out. The loan proceeds are generally provided to the borrowers as lump-sum payments, monthly payments, or as lines of credit.
628,000 Reverse Mortgage Loans
The reverse mortgage market is about 1 percent of the size of the traditional mortgage market, with 628,000 outstanding loans, according to industry reports. Most reverse mortgages today are federally insured through the Federal Housing Authority’s Home Equity Conversion Mortgage program, which carry some regulatory requirements.
But there are big downsides. The CFPB released a report in February chronicling reverse mortgage complaints — 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.
In a new study released Wednesday by the CFPB, 97 unique reverse mortgage ads found on TV, radio, in print, and on the Internet were shown to a group of homeowners age 62 and older.
The CFPB interviewed about 60 of these homeowners in focus groups and in one-on-one interviews in Chicago, Los Angeles, and Washington, D.C. The study found that many of the ads were incomplete and/or contained inaccurate information, the CFPB said.
“While advertisements frequently do not describe all the details of the particular product or service being sold, the incompleteness of reverse mortgage ads raises heightened concerns because reverse mortgages are complicated and often expensive loans intended for older, and frequently vulnerable, homeowners,” the agency said.
The study found that the ads were characterized by:
Ambiguity that reverse mortgages are loans: Some consumers found it difficult to understand from the ads that reverse mortgages are loans with fees and compounding interest; that the loans need to be repaid. Most ads either did not include interest rates or included interest rates in fine print. Other consumers thought that because the money they received through a reverse mortgage represented home equity they had accrued over time, there was no reason they would have to pay it back.
False impressions about government affiliation: The advertisements left some older homeowners with the false impression that reverse mortgages are a risk-free government benefit, and not a loan. The study found that consumers often misinterpret the role of the federal government in the reverse mortgage market as providing consumer protections that are not actually offered.
Difficult-to-read fine print: The study found that some consumers did not pick up on key aspects of the loan because the loan requirements were often buried in the fine print if they were even mentioned at all. Many reverse mortgage ads reviewed did not, for example, mention helpful information like interest rates, repayment terms, and other requirements.
Celebrity endorsements that imply reliability and trust: Many ads featured celebrity spokespeople discussing the benefits of reverse mortgages without mentioning the risks. Most consumers recalled TV ads that featured spokespeople portrayed as reliable and trustworthy. One consumer in one focus group said, “When it’s a former Congressman endorsing it, it makes it sound like a good idea.”
False impressions about financial security and staying in the home for the rest of the consumer’s life: The study found that many ads implied financial security for the rest of a consumer’s life. But a reverse mortgage does not guarantee financial security no matter how long a consumer lives. A consumer can tap into their equity too early and run out of funds to draw on. In addition, borrowers with a reverse mortgage are still responsible for paying property taxes, homeowner’s insurance, and property maintenance. Failing to meet these requirements can trigger a loan default that results in foreclosure. Most of the advertisements reviewed failed to mention such requirements.
Read the CFPB’s consumer advisory here.