Reverse Mortgages
Refinance

Reverse mortgage criticism, rebuttals coming to a head

by Broderick Perkins

(6/25/2012) It's no coincidence a trade group launched a new campaign promoting reverse mortgages about a month before the industry's federal regulator completes its first study of the controversial loans.

On June 21, the National Reverse Mortgage Lenders Association (NRMLA) announced its new Borrow With Confidence reverse mortgage marketing campaign to lobby for limited regulatory control and to extol the virtues and value of reverse mortgages.

The announcement comes with the Consumer Financial Protection Bureau (CFPB) about a month away from completing its study of reverse mortgages and, if past independent studies are any indication, NRMLA will need the head start.

On June 20, CFPB also announced, ahead of its final report on reverse mortgages, plans for a field hearing on reverse mortgages. The hearing is set for Wednesday, June 27 in the Ballroom of the Tampa Convention Center, Florida.

The hearing will include remarks from Richard Cordray, CFPB director as well as testimony from consumer and civil rights groups, industry representatives, and members of the public.

Expect fireworks.

Reverse mortgages has been a hot button issue for years. The loans are considered by most consumer advocates to be a home loan of last resort.

The trade group launched Borrow With Confidence specifically to counter that kind of criticism.

"A reverse mortgage, like Social Security, Medicare/Medicaid, IRAs and 401ks, is an option in a retirement toolbox - and different situations require different tools," according to the association.

What's a reverse mortgage?

Reverse mortgages are for borrowers 62 or older. The loans, tied to home equity, offer cash payments or lines of credit or a combination of both.

They are called reverse mortgages because no payments are due until the borrower dies, sells the home, leaves the home for 12 consecutive months or more, or fails to maintain the property or pay homeowners insurance or property taxes.

Under those circumstances, the full balance is due. Borrowers also pay a loan origination fee, closing costs, mortgage insurance and compounding interest on the loan principal, all of which can be significant, according to critics.

What's the big deal?

Studies and reports by Consumers Union, AARP, the National Council on Aging (NCOA) and others say even though the industry is dominated by the U.S. Department of Housing and Urban Development's (HUD)-insured Home Equity Conversion Mortgage (HECM), the industry is under regulated.

Plans to further regulate the industry have been overdue for years . A MetLife Mature Market Institute study, in conjunction with the National Council on Aging, found growing interest in the special loans among younger seniors.

Critics say the weak economy is driving more consumers to reverse mortgage lenders at a time when the industry needs to weed out misleading advertising, loans with exorbitant costs, complex and confusing documentation and fraud.

Borrow With Confidence

NRMLA, through the Borrow With Confidence campaign, sees it another way. It says reports and studies are often over stated and filled with misperceptions which it wants to dispel.

All according to NRMLA:

• Reverse mortgages aren't a scam. Done right, a reverse mortgage is a well-conceived, creative and effective solution for some seniors who are equity-rich but income poor during retirement. Longer lives means retirement savings, reduced by the economic downturn, may not be enough to financially sustain some older homeowners. Rather than selling outright, a reverse mortgage allows older homeowners to say in their home and live off their hard-earned equity.

• Reverse mortgages aren't a loan of last resort for all seniors. A reverse mortgage can be used to cover expenses until retirement savings return to pre-recession levels. Likewise it can be used to see some homeowners through until home values recover at which time they can sell the home at a higher price

• Reverse mortgages aren't expensive. Reverse mortgage fees are similar to those for any other mortgage product. A mortgage insurance premium is added to pay government mortgage insurance - protection from the loan balance growing larger than the home's value. A "HECM Saver" has virtually eliminated the upfront mortgage insurance. Other traditional fees are sometimes waived by the lender.

• Less advertising is misleading. There are fewer ads that claim the mortgages are "government sponsored" (they are not), that contain an artificial check and ads that falsely promise "no payments for life" (You must continue to pay property taxes and homeowners insurance).

Federal agencies have passed regulations forbidding specific misleading language and marketing. NRMLA also specifies advertising restrictions in its code of ethics and professional responsibility sections on Borrow With Confidence. Companies that run misleading ads are subject to various forms of punishment. If you see or receive a misleading or false ad, you can report it to NRMLA.

In addition to NRMLA's suggestion, homeowners should first file complaints with the CFPB as well as HUD, the current federal overseers for reverse mortgages.

The financial industry has had difficulty regulating itself.