The U.S. mortgage market’s new regulator has found cause to worry about reverse mortgages in a recent report, a sign that tighter rules may be on the way.
The Consumer Financial Protection Bureau (CFPB), assigned oversight of all mortgages as a result of the Frank-Dodd act, issued a warning in its report about the hazards that could befall seniors taking on reverse mortgages.
The study, commissioned by Congress, found that borrowers are obtaining reverse mortgages at much younger ages, taking out riskier lump sum payments, and falling into default at higher rates.
A reverse mortgages allows homeowners age 62 and older to get a mortgage loan based on the equity in their homes. The borrower receives cash and in return, the bank gets repaid (usually from the proceed of selling the house) when the homeowner vacates the property or dies.
The problems come in when borrowers do not fully understand the rules and limitations of the loan, which can be confusing.
“Many aspects of a reverse mortgage do seem counter-intuitive, says Peter Bell, president of the National Reverse Mortgage Lenders Association as quoted in a Reuters article. “They are not fully understood.”
The CFPB’s report found that about half of all reverse mortgage borrowers were younger than age 70, with plenty of potential time to stay in their homes. Yet with 70 percent of homeowners taking out their loan in large lump sums at the beginning of the loan, if emergencies or crises hit, these borrowers often have no funds left to tap.
“The lump sum loan leaves you with no flexibility or cushion,” says Megan Thibos, a policy analyst in CFPB’s mortgage markets group and principal author of the CFPB report. “If you take an adjustable rate line of credit and fail to pay your taxes or insurance, the lender can process a payment from your line of credit. But that’s not possible if you’ve taken it all upfront.”
And that has resulted in higher default rates, with 9.4 percent currently delinquent on their payments, according to the Department of Housing and Urban Development. Based on those findings, it is likely that the CFPB will institute stricter regulation soon, in an effort to protect seniors from the pitfalls of reverse mortgages.