August 13, 2012

Report Highlights a Rise in Reverse Mortgages

As baby boomers edge toward retirement, they are beginning to transform yet another slice of the financial industry: the market for reverse mortgages, a type of loan in which older homeowners borrow against the value of their house.
The Consumer Financial Protection Bureau, in a report to be released Thursday, said that the number of consumers taking out a reverse mortgage at their first opportunity — age 62, under federal law — has jumped drastically. In 2011, 9 percent of reverse-mortgage borrowers were age 62, up from 2 percent during the 1990s. Nearly half of recent borrowers are under 70.
The number of reverse-mortgage originations has fallen since it peaked at 115,000 before the financial crisis; last year, 72,000 loans were issued. But the bureau said it had begun to see renewed interest in the loans, 582,000 of which are currently outstanding, representing $136 billion of home value.
A growing portion of reverse-mortgage consumers are taking the proceeds in a lump sum, rather than in a stream of payments. And they often are using the proceeds to pay off other debt — a troubling trend, the bureau said in the report, which was undertaken as required under the Dodd-Frank regulatory law.
Reverse mortgages have grown in popularity because, for most Americans, their biggest asset is their investment in their home. But that asset provides no regular income.
By borrowing against the value, with the amount owed growing over the life of the loan, homeowners can take cash out of their home to supplement retirement income.
The loans are attractive because they do not require any payments until the borrower’s death or the sale of the house. But authorities said the products have also led to abusive conduct in the sale and marketing of the loans.
Under the Dodd-Frank law, the consumer bureau can set requirements for the sale of reverse mortgages.
The Federal Reserve had started to consider rules for the product; its authority has now been shifted over to the consumer bureau, which said it “will consider measures to ensure that the reverse mortgage market is working well for consumers and responsible lenders.”
The report acknowledges that the National Reverse Mortgage Lenders Association has been developing a disclosure form that lists the obligations of borrowers and that details how the failure to meet those obligations could result in a borrower losing his or her home.
The consumer bureau is asking for comment on the report and on what influences consumers’ decision making. Also of interest to the bureau are details on compensation practices in the industry. 
Homeowners who have a reverse mortgage must pay property taxes and maintain homeowners insurance over the course of the loan.
Roughly 70 percent of borrowers in 2011 took their reverse mortgage in a lump sum, the bureau found; as recently as 2008, that figure was 40 percent. By taking the loans when they did not have an immediate need for the money, consumers may find themselves without the resources to pay for a future move or health care, the bureau said.
Reverse mortgages can be a reasonable tool in a financial portfolio, Ms. Garcia said. “But it has to be the right borrower and it has to be the right loan,” she added.

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