Seniors should be better protected against reverse mortgage abuses, says Consumers Union, the advocacy arm of Consumer Reports. The organization has called for stricter oversight of the industry as lenders launch a public relations campaign to repair their image.
Home equity represents about 70 percent of the total assets of middle-income retirees, not counting Social Security and pension benefits.
Reverse mortgages enable borrowers 62 or older to obtain income through cash payment or lines of credit via their home equity. The reverse mortgage loan is due when the borrower either dies, leaves the home for 12 consecutive months or more, or fails to maintain the property or pay homeowners insurance or property taxes. Borrowers must pay a loan origination fee, closing costs, and compounding interests on the loan principal, which can be significant.
Consumers Union called on the Consumer Financial Protection Bureau to ensure loans are suitable for borrowers, outlaw deceptive marketing, adopt stronger prohibitions on cross promotions, strengthen the quality and content of counseling, and protect non-borrowing spouses and tenants.
The CFPB is scheduled to hold a hearing on the topic Wednesday, June 27.
"Reverse mortgages should only be used as a last resort because they can carry huge costs that can quickly drain a homeowners equity," said Norma Garcia, senior attorney and manager of Consumers Union's financial services program. "The reverse mortgage industry insists that it can police itself but it's clear we need common sense oversight by the CFPB to protect seniors."
Many people, even those who hope to leave their house to their children, often have no choice but to tap their home equity when facing financial or health crises. For more about living off your home equity see our report on Reverse mortgages and their alternatives.
A 2010 report by Consumers Union (pdf) documents concerns that underscore the need for stronger oversight by the CFPB. The report was co-authored by California Advocates for Nursing Home reform and the Council On Aging Silicon Valley.
Consumers Union Renews Call for Stricter Oversight of Reverse Mortgages [Consumers Union]
Save the date, Tampa, FL! [CFPB]