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Reverse Mortgage Cons
Reverse mortgages can be a great way for senior homeowners to convert their home equity into cash while continuing to live in their homes. Recently, though, the Government Accountability Office (GAO) has reported that a lack of oversight by the Department of Housing and Urban Development (HUD) makes seniors vulnerable to abusive lending practices in the reverse mortgage market. The practices in question include misleading marketing and inappropriate cross-selling of other financial products that may be unsuitable for them.
Home Equity Conversion Mortgages (HECM) offer senior homeowners additional income to help cover the costs of medical expenses, home repairs, family visits, groceries and car payments that exceed social security and Medicaid assistance. Sometimes a reverse mortgage can make all the difference necessary for a happier retirement. Seniors do not have to pay back the home loan or the accumulated interest until they die or sell the home. However, HECMs require substantial insurance and startup costs, and offer a ripe field for mortgage fraud scammers.
Reverse Mortgage Cons – GAO warns
GAO discovered that in some instances, HUD, the federal agency responsible for protecting consumers from being deliberately misled by lenders, fell short when it came to adequately informing seniors of the reverse mortgage cons.
Some of the reverse mortgage cons are these loans carry large insurance and origination costs. What is often not mentioned to prospective borrowers is that their loan may affect their eligibility for government benefits like Medicaid. Also, another reverse mortgage con is it depreciates the value of parents’ inheritance for their children.
GAO financial products like annuities are being sold in conjunction with reverse mortgages, which may not be suitable in some situations. Though the Housing and Economic Recovery Act of 2008 was established in part to restrict this cross-selling, it is still working on developing these regulations.
Reverse Mortgage Cons – Counseling requirements
Another policy designed to protect seniors are strict counseling requirements prior to borrowing. However, when GAO employees went undercover to receive such counseling they found inconsistency. Though the counselors generally conveyed accurate and useful information, none of the counselors covered all of the topics required by HUD. In almost half the sessions the counselors did not discuss required information about alternatives to reverse mortgage cons.
Their conclusion is that the issues present “emerging consumer protection risks” for reverse mortgage cons. GAO makes a number of recommendations to improve consumer protections including that the heads of all federal agencies responsible for oversight of the mortgage lending industry improve their consumer awareness and oversee better industry marketing practices as well as claims related to reverse mortgage cons.
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Tags: GAO hecm, GAO hecm consumer, GAO reverse mortgage consumer, reverse mortgage product
