Reverse mortgages are “very risky” for ill-prepared borrowers and should only be used as a last resort, according to a report from three consumer groups. The new federal regulator being created for consumer financial products should exercise strong oversight on such loans, the groups say.
With demand rising for reverse mortgages, senior citizens are particularly at risk of being misled and should be protected by greater government oversight of the industry, according to a report by Consumers Union and two California advocacy groups.
In a struggling economy, older homeowners are turning to reverse mortgages as a way to pull money out of their homes, with the loan not coming due until the borrower dies. But the loans can come with hefty charges, including origination fees, closing costs and compounding interest on loan principal.
“Reverse mortgages are a very risky deal for borrowers who don’t understand the complicated terms of the loan and how quickly fees and interest charges can add up,” said Norma Garcia, senior staff attorney for Consumers Union.
“Reverse mortgages should only be a last resort for seniors who want to stay in their homes and have no other alternatives to supplement their income,” she said.
The report was released Tuesday by Consumers Union, the nonprofit publisher of Consumer Reports magazine, along with California Advocates for Nursing Home Reform and the Council on Aging Silicon Valley. It warned that seniors taking out reverse mortgages risk losing their homes while they’re still alive.
The groups called for strong oversight from the new federal Consumer Financial Protection Bureau, which is being launched by Obama administration appointee Elizabeth Warren as part of financial reform legislation passed this year.
The report lists concerns including misleading marketing claims by lenders; attempts to sell borrowers other products at the same time, such as long-term-care insurance or annuities, and an increasing number of borrowers defaulting on reverse mortgages, triggering foreclosures.
Consumers Union offers tips about reverse mortgages on its Web site.
The site’s offerings include information about applying for government benefits for seniors, getting advice from local Housing and Urban Development counselors and seeking a so-called private reverse mortgage — a loan from a family member using the senior’s home equity as collateral.
