In a new study, the Consumer Financial Protection Bureau (CFPB) criticizes reverse mortgages as misleading and as having resulted in senior citizens being confused about exactly what such a transaction involves. The CFPB concluded that, although this type of loan may help some seniors, these loans can pose serious financial risks to seniors who do not fully appreciate the details of their loans.
A reverse mortgage is a type of home loan available only to seniors 62 years of age and older. Such a borrower is able to take equity out of the home each month while making no loan payments. It is essentially a mortgage in reverse—the homeowner receives a monthly payment from the lender. Of course, the result of this loan is that the balance grows each month, while the borrower-homeowner’s equity in the home shrinks. This type of loan has received more attention in recent years, because it has been advertised by well-known figures such as former U.S. Senator Fred Thompson.
Despite recent growth in popularity (according to CNBC, these loans currently constitute 1 percent of the U.S mortgage market), the CFPB has warned seniors about these loans. The CFPB’s warning comes as a result of a study in which the CFPB conducted a focus group of 59 diverse homeowners in Chicago, Los Angeles, and Washington, D.C. This study found that most of these seniors had seen advertisements promoting reverse mortgages, but these seniors often did not fully understand how a reverse mortgage works. For example, some seniors were unaware that the money received eventually would have to be repaid, that interest would be charged, that they could potentially lose their homes from taking reverse mortgages, or that reverse mortgages were not part of a government-run program. Seniors in the focus group told the CFPB’s study that the advertisements for reverse mortgages conjured images of living a good lifestyle while they were still healthy, traveling, and enjoying an active retirement. Seniors also reported being unable to read the fine print—literally—that describes the terms of reverse mortgages.
The CFPB warned that taking a reverse mortgage at the early point of eligibility is a risky decision because as people live longer, seniors risk outliving the number of months for which they can receive equity out of their homes. This financial risk is even greater for seniors with little or no retirement savings, a situation in which more Americans are finding themselves. For instance, the median retirement account balance for retiring seniors is only $103,000, and research suggests that almost half of seniors will find themselves lacking resources for basic expenses and health insurance. Making matters worse, this financial stress comes at a time when major expenses (such as long-term care) can be significant.
The CFPB’s study did not indicate what future steps it may take in response to these findings. Given the CFPB’s generally aggressive approach to responding to issues that it believes are in the best interests of consumers, it is reasonable to expect the CFPB will, at a minimum, take additional steps to educate seniors about the risks associated with reverse mortgages. Stay tuned to see what the CFPB does next in response to its findings in this new study.