Responding to a provision in the Dodd-Frank Act requiring the Consumer Financial Protection Bureau to study reverse mortgages, the CFPB released this report June 28. CFPB also said it would take steps to help consumers better understand reverse mortgages before they enter into an agreement to obtain one.
Among CFPB’s key findings:
- Reverse mortgages are complex products and difficult for consumers to understand. The rising balance, falling equity nature of reverse mortgages is particularly difficult for consumers to grasp, the report said. Furthermore, CFPB says current disclosures are insufficient to ensure consumers make good tradeoffs and decision.
- Reverse mortgage borrowers are taking out loans at younger ages than in the past. In 2011, nearly half of borrowers were younger than 70.
- Reverse mortgage borrowers are withdrawing more of their money upfront than in the past. In 2011, 73 percent of borrowers took all or almost all of their available funds upfront at closing. This proportion has increase by 30 percentage points since 2008.
- Reverse mortgage borrowers appear to be increasingly using their loans to refinance traditional mortgages.
- As of February 2012, 9.4 percent of reverse mortgage borrowers were at risk of foreclosure due to nonpayment of taxes and insurance. This proportion is continuing to increase.
CFPB said it expects to undertake a project to improve and integrate TILA and RESPA disclosure requirements for reverse mortgages. Furthermore, CFPB said it will consider a 2010 proposal by the Federal Reserve regarding reverse mortgages. The proposal would have placed limits on misleading advertising, improved disclosures, and closed regulatory gaps related to cross-selling, among other things.
Reverse mortgages allow senior citizens to access equity they have built up in their homes immediately, and defer payment of the loan until they die, sell or move out of the home. Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. The rising loan balance can eventually grow to exceed the value of the home, particularly in times of declining home values or if the borrower continues to live in the home for many years.
The current market for reverse mortgages is relatively small, although the CFPB report notes that as more Baby Boomers become senior citizens, the reverse mortgage market will grow substantially. About 2 percent to 3 percent of eligible homeowners currently have a reverse mortgage, and only about 70,000 new reverse mortgages are originated each year. About 32 million homeowners fall in the Baby Boom category (age 48 to 66 years old); as of 2009, median home equity for Baby Boomers households was $108,000.
Reverse mortgages typically are insured by the Federal Housing Administration through its Home Equity Conversion Mortgage program. The insurance guarantees that borrowers will be able to access their authorized loan funds in the future. Lenders are guaranteed that they will be repaid in full when the home is sold, regardless of the loan balance or home value at repayment. Borrowers or their estates are not liable for loan balances that exceed the value of the home at repayment, as FHA covers that risk.
The report notes that reverse mortgage customers increasingly are taking the full amount for which they qualify upfront as a lump sum. In many cases, borrowers are using that money to refinance an existing mortgage or other debt. By refinancing with a reverse mortgage, borrowers eliminate their monthly mortgage or debt payments but the interest on the loan will chip away at their remaining home equity over time. CFPB noted, however, that if borrowers take their full equity upfront, nothing is left for emergency needs later in life.