Michigan Internet Marketing Club: New protections, cautions on reverse mortgages

New protections, cautions on reverse mortgages

Surviving spouses of reverse mortgage borrowers now could be better protected against eviction thanks to a rule issued recently by the Federal Housing Administration. But a new study by the Consumer Financial Protection Bureau underscores that borrowers still can get into trouble with this products due to potentially misleading advertising.

Last week, the FHA announced a policy change to potentially allow all spouses of people who enter into reverse mortgages—also known as home equity conversion mortgages (HECMs)—to stay in their homes after the borrowers die, regardless of when the loan was made.

Reverse mortgages let borrowers who are 62 or older get income by tapping the equity in their home. In the past, reverse mortgage contracts required that the loans be repaid upon death of the borrowers. Otherwise, lenders could foreclose. Numerous widows and widowers, some of whom had no idea their spouses had borrowed against their homes, were threatened with eviction when they could not repay the loans.

Thanks to the new rule, lenders have the option to assign such loans to the Department of Housing and Urban Development after the last surviving borrower dies. The surviving spouse can then stay in the home if he or she makes timely tax and insurance payments; maintains the property according to the HECM contract; and can prove legal marriage to the borrower, primary residency in the home, and the legal right to stay in the home.

The rule, affecting loans made before August 4, 2014, follows up on an earlier ruling affecting loans made after that date.

Get unbiased advice on retirement finances with Consumer Reports’ Retirement Planning Guide.

Reverse mortgages can be lifesavers. But with origination fees, closing costs, and interest on the principal—among other expenses—they can be costly. And even with the new FHA rule, borrowers and their surviving spouses still can face significant risks. Not keeping up on property taxes or maintenance, for instance, could lead to foreclosure.

In fact, a recent CFPB study found reverse mortgage advertisements underplayed those risks. The bureau, which regulates loans and credit products, found the ads were incomplete, and provided inaccurate descriptions. Key loan requirements “were often buried in fine print, if they were even mentioned at all,” the CFPB reported. As a result, it concluded, consumers could be misled into borrowing products that they really didn’t understand.

It’s that potential to mislead that has prompted Consumers Union, the advocacy arm of Consumer Reports, to recommend that all reverse mortgage lenders give borrowers a reverse mortgage worksheet, now mandated for all reverse mortgage borrowers in California. Studies show that unlike a disclosure, a worksheet can guide the borrower through a more thoughtful decision-making process.

Heed these other recommendations before you borrow:

Go for face-to-face counseling. You’re required to talk to a mortgage counselor to discuss eligibility, financial implications, and alternatives. While you can talk on the phone for counseling, we urge you to have a face-to-face session (find info here about local counseling agencies).
Calculate your ongoing expenses. If you can’t keep up with homeowners insurance, property taxes, and maintenance, you could default and lose your home.
Visit a financial adviser or CPA. There may be other options, like borrowing from family that might work better for you.

— Tobie Stanger