Recent updates to reverse mortgage rules places borrowers' well-being first and helps with unanticipated issues, according to the Federal Deposit Insurance Corporation's (FDIC) Summer 2015 newsletter released Thursday.
Senior citizen homeowners looking to obtain a reverse mortgage loan, which allows them to borrow against a portion of the equity in their house, are often unaware of the problems they may encounter when taking out this type of loan, the FDIC noted. The reverse mortgage allows the lender to pay the borrower money requested without repayment until the borrower no longer lives in the home.
"While a reverse mortgage can be used to supplement monthly income, obtain lump-sum cash or otherwise help a senior citizen 'age in place,' some borrowers may face unintended obstacles and consequences, especially if they no longer have the ability to pay taxes or property insurance," said Richard Schwartz, FDIC counsel.
"Borrowers may face unintended obstacles and consequences, especially if they no longer have the ability to pay taxes or property insurance."
According to the FDIC, recent HUD regulation protects surviving spouses after death of a reverse mortgage borrower. Previously, within HUD's most popular reverse mortgage program, the Home Equity Conversion Mortgage (HECM), non-borrowing spouses that are not on the loan could not remain in the property after the borrower passes. However, new regulation allows non-borrowing, surviving spouses to remain in the home pending certain conditions are met. These changes apply to reverse mortgage loans in which the borrowing spouse applied for a reverse mortgage before August 2014.
"Many borrowers who opted to exclude the younger spouse from the loan in order to qualify for a HECM did so with the hope that when the younger occupant became 62 they could refinance and add the spouse," said Andrea Riche, an FDIC program manager who oversees reverse mortgage issues. "But when home prices nationwide dropped in 2007 and 2008, the possibility of refinancing into another HECM was eliminated. And if the borrowing spouse passed away, HUD or the private lender became entitled to take possession of the home and the surviving spouse was almost always evicted. But now, HUD provides a mechanism for an eligible non-borrowing spouse to stay in the home."
In an additional effort to help senior citizen borrowers, the Consumer Financial Protection Bureau (CFPB) issued a warning to consumers about the misleading effects of reverse mortgage advertisements in June 2015.
The Bureau released results of a focus group study on reverse mortgage advertisements and found that many participants were left confused about the product.
“As older consumers consider reverse mortgage loans to tap into their home equity, they need to be careful of those late night TV ads that seem too good to be true,” said Richard Cordray, CFPB director. “It is important that advertisements do not downplay the terms and risks of reverse mortgages or confuse prospective borrowers.”
The study found that after viewing the ads, consumers did not understand that reverse mortgages were actual loans. Instead, they were left under the false impression that reverse mortgages are a government-issued program that helps consumers stay in their home for the rest of their lives.
The CFPB’s Consumer Advisory Warning:
- A reverse mortgage is a home loan, not a government benefit: Consumers need to know that reverse mortgages have fees and compounding interest that must be repaid, just like other home loans.
- Reverse mortgage ads do not always tell the whole story: Reverse mortgage ads do not always tell the whole story, such as that a consumer can lose ownership of their home.
- Without a good plan, a consumer could outlive the loan money: Consumers should have a financial plan in place that accounts for a long life.