While reverse mortgages can be a boon to seniors as they head into retirement, a new report from the ""National Center for Policy Analysis"":http://www.ncpa.org/index.php (NCPA) says recent trends show trouble in the market that may cost taxpayers billions of dollars.[IMAGE]
One major problem, the group notes, is that borrowers are now applying for reverse mortgages at earlier ages. According to a 2012 ""MetLife"":https://www.metlife.com/individual/index.html?WT.ac=GN_individual survey, the average borrower is now 71.5 years old; however, one in five borrowers are between the ages of 62-64, putting them at the low end on the eligibility range.
Moreover, two-thirds of borrowers are now using reverse mortgages to pay down debt--including conventional mortgage debt. Approximately 84 percent of borrowers under the age of 70 have some kind of debt to pay; 72 percent are dealing with mortgage debt (with or without other debts). About 62 percent of borrowers age 70 and older had mortgage debt to contend with.
In addition, the MetLife survey found that one-third of homeowners using reverse mortgages have a mortgage balance that is at least half of their home value.
Pamela Villarreal, a senior fellow and retirement expert at NCPA, expects the ""troubling trend will increase as more baby boomers enter retirement with mortgage debt than previous generations.""
What's more, Villarreal says that many lenders aren't doing enough to properly educate consumers on their rights and responsibilities regarding reverse mortgages. An audit of 15 lenders performed by the ""Government Accountability Office"":http://www.gao.gov/ (GAO) found that none of the audited firms covered all of the required topics, and seven did not offer up any information on other, less complicated financial products.
Fourteen of the 15 lenders failed to ask homeowners if they had signed a contract or agreement with an estate planning service--a question required by the ""Federal Housing Administration"":http://portal.hud.gov/hudportal/HUD (FHA), which insures and regulates reverse mortgage products.
In light of this fact (and the fact that 9.4 percent of reverse mortgages are at risk of default, according to a report from the ""Consumer Financial Protection Bureau"":http://www.consumerfinance.gov/), Villarreal suggests FHA should step back from the market altogether, especially considering the agency's shaky financial status. (FHA has taken steps in recent months to reform its reverse mortgage pricing, citing the considerable damage its old program caused.)
""With a much higher default rate than traditional mortgages, reverse mortgages and their inherent risks should be left up to the market, not the Federal Housing Administration,"" Villarreal said. ""If lenders cannot and will not bear the risk, the reverse mortgage market should not exist in the first place.""