Are Reverse Mortgages Unduly Risky?

September 6, 2018

This is the impression conveyed by numerous press accounts, including a recent article by Alfred Lubrano in the Philadelphia Enquirer entitled “Risks of Reverse Mortgages.” The major themes that emerge from that article is that:

  • Reverse mortgages carry hidden risks that can lead to loss of the borrower’s home.
  • The deceptive advertising of reverse mortgages on TV does not reveal the hidden risks.
  • Predatory marketing targets low-income households and minorities.
  • Reverse mortgages nullify inter-generational wealth transfers.

Are the Risks Hidden?

The obligations of reverse mortgage borrowers are very clear. They must pay their property taxes and homeowners insurance, and maintain their property. Failure to do any of this can result in foreclosure and loss of the home.

These obligations are hardly hidden. Potential borrowers approaching a lender receive a “Home Equity Conversion Mortgage Analysis” with their name on it. This is a bundle of documents designed to educate the consumer about reverse mortgages in general, and it indicates the terms and options available to the person named. On page 2 of this document, it says “With a Home Equity Conversion Mortgage you retain title to your home. This means that you also have all your obligations as a home owner. You are responsible for home owner taxes and insurances.” This is repeated on p.8 and at numerous other places.

In addition to the uniquely comprehensive disclosures they receive, reverse mortgage borrowers must be counseled by an independent counselor approved by HUD. Lenders cannot accept an application until the applicant produces a certificate from an approved counselor. The borrower’s obligations under the reverse mortgage contract are a standard part of every counselor’s agenda.

In sum, I view driving a car as a lot riskier than taking a reverse mortgage. When you drive, you have no control over the maniacs on the road, but when you take a reverse mortgage you are fully in charge of all the risks.

Deceptive Advertising

Drug advertisements are required by law to include side effects and dangers, but that is not true of other advertisements. Advertisers of everything else, including reverse mortgages, stress the positives. In that regard, reverse mortgage ads are no better or worse than automobile ads.

Astute consumers know that you select an automobile based not on ads but on information from an independent source such as Consumer Reports. Astute reverse mortgage borrowers can make an intelligent selection based on Mortgage Professor. Yes, that is self-serving, if there were other multi-lender networks in reverse mortgages, I would cite them, but unfortunately as of now, mine is the only one. I have petitioned HUD to certify multi-lender networks in reverse mortgages, but so far to no avail.  

Predatory Practices 

To assess the allegation that reverse mortgage lenders are predators requires a distinction between the lending firms and their loan officer (LO) employees. LOs who encourage borrowers to take maximum cash upfront – generating a larger commission for the LO -- are predators. There are some LOs who do this, it might even be the case that they are especially numerous in this market because so few HECM borrowers are well informed about the product. But note that LOs can’t be predatory if borrowers access them through a multi-lender network such as mine, because these borrowers see all the various ways to draw funds, as well as the amounts offered by different firms, before they ever see an LO.

As opposed to commission-driven LOs, there is no evidence that reverse mortgage lenders engage in predatory behavior, no matter how that term is defined. Among the 9 lenders who offer reverse mortgages on my web site, despite our invitation as the borrower’s ombudsman to report any problems, we have yet to receive a single complaint.  

My surmise is that the term “predatory lending” is misused to describe marketing efforts directed toward homeowners in financial distress. Because of the bad press, as typified by the newspaper article that stimulated this rejoinder, HECM borrowers are not a cross-section of homeowners. Rather, they are heavily weighted by homeowners in trouble. This is a group that may not read the disclosure documents they are given very carefully, and may generate losses to the insurance reserve fund. The viability of the HECM program over the long run depends on whether it can attract more borrowers who can get along without it but can significantly improve their lifestyle with it.

Frustrate Inter-Generational Wealth Transfers

HECMs reduce homeowner equity, which reduces the value of estates that are transferred to the next generation. That is not a weakness of the program, it is by design. The presumption is that the homeowner can make better use of the equity than his heirs. Homeowners who are committed to leaving a debt-free house to their children, don’t take out a HECM.

In or near retirement? The Professor’s Retirement Funds Integrator (RFI) might enhance your life during retirement.

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