Reverse Mortgage Ads May Sidestep Potential Pitfalls

[TheNutcracker]

JUNE 9, 2015
By ANN CARRNS

Confusing and inaccurate advertising about reverse mortgages persists despite recent efforts to curtail it, a new report finds, so potential borrowers should be wary.

A reverse mortgage is a loan that lets older people tap the equity they have built up in their homes. No principal or interest payments are due until the borrower dies, or moves out of the house. To qualify, a borrower must be at least 62 and have significant home equity.
The loans may make sense for some borrowers, but they are complex financial products. Lender advertising often omits or oversimplifies their potential pitfalls, according to a report this month from the Consumer Financial Protection Bureau. “Many consumers were very confused,” said Stacy Canan, deputy assistant director of the bureau’s Office for Older Americans. While it’s not the bureau’s position that reverse mortgages are an “unsuitable” product, she said, consumers must fully understand the risks.

For instance, while borrowers don’t have to make monthly payments on the loan, they do have to pay property taxes, homeowners’ insurance and maintenance costs. If they do not, their lender may declare a default and start foreclosure proceedings. “Advertisements that create the impression that there is no risk can thus be misleading,” the report said.

For the report, the bureau interviewed 59 homeowners who were eligible for reverse mortgages, in Chicago, Los Angeles and Washington. The bureau interviewed participants in focus groups and individually, and had them review several ads from a selection of 97 television and print pitches for reverse mortgages, before asking for their impressions.

Some consumers said they did not understand that reverse mortgages are actually loans that would have to be repaid in the future, the report found. Some said that ads claiming that reverse mortgage funds were “tax free” led them to believe they would not have to pay property taxes. Others believed reverse mortgages were a government program, and therefore safer, although the loans are made by private lenders.

The report follows bureau action earlier this year against three mortgage lenders, for implying in ads that reverse mortgages were government-affiliated. (Most reverse mortgages are insured through the Federal Housing Administration, so that borrowers continue to receive their loan funds if their lender gets into financial trouble. If their loan balance exceeds the value of their home, F.H.A. may cover the difference for the lender, when the loan is repaid).

About 52,000 reverse mortgages were endorsed by the Housing and Urban Development Department for F.H.A. insurance for the federal fiscal year ended Sept. 30, and more than 620,000 loans are currently outstanding, according to statistics provided by the National Reverse Mortgage Lenders Association, an industry group.

Peter H. Bell, the association’s president, said members of his group agreed to ethical standards in advertising. The standards preclude calling reverse mortgages a “government benefit,’ and require ads to fairly describe related risks.

“We share the concern that reverse mortgage advertising should be accurate and truthful and give full information about reverse mortgages,” Mr. Bell said.
He also noted that borrowers were required to undergo mortgage counseling with a government-approved counselor before they took out a reverse mortgage. “The ad is the beginning of a lengthy informational process,” he said.

Consumer advocates, however, say some mortgage counselors are better than others. “The quality of the counseling really varies,” said Sarah Bolling Mancini, a lawyer with the National Consumer Law Center. Counseling is often done over the telephone, she said, and some counselors may follow a script offering generic advice, rather than delving into an individual’s unique financial situation.
Here are some questions to consider about reverse mortgages.

■How much can I borrow using a reverse mortgage?
That depends on various factors, like your age, the value of your home and the interest rate offered by your lender. Rules aimed at reducing risk now generally limit borrowers to taking no more than 60 percent of their overall equity in the first year after taking out the loan. Also, in some cases, lenders may require that funds be set aside for the tax and insurance payments, said Ramsey Alwin, director of economic security at the National Council on Aging.

■Where can I find a H.U.D.-approved reverse mortgage counselor?
Contact information is available on H.U.D.’s website. (H.U.D.’s term for a reverse mortgage is “Home Equity Conversion Mortgage,” or H.E.C.M.)
Lower-income borrowers may qualify for free counseling, but others may be charged a fee ranging from $90 to $135, Ms. Alwin said. Sessions typically last at least 90 minutes.

■How can I make the most of reverse mortgage counseling?
Ms. Bolling Mancini suggests calling several counselors to find one that will meet face to face, and coming prepared to ask questions about your specific financial situation. “In person, the counselor can show numbers on paper,” she said. “Doing it on the phone doesn’t work as well.”
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http://www.nytimes.com/2015/06/10/your-money/reverse-mortgage-ads-may-sidestep-potential-pitfalls.html?_r=0

[TheNutcracker]

1. A DU'er asked about reverse mortages and this is currently circulating in the press

Hope it helps....

[ablamj]

2. I've always found the commercials confusing too

"You can keep your house" Henry Winkler says. But if payments are due when you die, who makes them? If you die broke, your family loses the house unless they can afford the payments, right? So basically isn't this just a way to take old people's houses?

[Ruby the Liberal]

4. Guessing it is "you can stay in hour house"

The house isn't free and clear - and with any Estate sale, the bank would be paid back the outstanding balance from the proceeds of the sale of the home (and presumably contents/estate). The heirs would receive any funds remaining.

[ablamj]

6. So basically

I'm right. This is just a scam to steal old people's houses.

[Ruby the Liberal]

8. Some, probably

But in concept, no. It gives a monthly income based on the equity in the home that can be used for expenses. When the owner dies, whatever amount they had taken out will have to be repaid - just like a mortgage that isn't paid in full.

[geek tragedy]

7. If they don't have any kids, it's not the worst thing. nt

[Ruby the Liberal]

3. They aren't suitable for most people over 65

Despite what the hucksters like Fred Thompson and The Fonz want people to think in their TV commercials.

Anyone considering this needs to be very careful about the lender they choose. Someone in their 90s+ who is capable of remaining in their home (but has medical expenses such as assisted living help or in home nursing care) *could* benefit, but only if it is structured correctly. The first question I would ask is if the lender is willing to escrow the taxes and insurance out of the monthly payment and take responsibility for making those payments. This is an area that a lot of older folks get tripped up on, and losing your home to a county sheriff tax lien is a horrifying experience.

[hobbit709]

5. What financial ad for anything doesn't gloss over the not so good aspects?

[Hoyt]

9. These loans are a ripoff, but some people just don't have any other option.

The commercials suck. Are these washed up actors that broke to have to do them?