The Consumer Financial Protection Bureau (CFPB) issued on Feb. 9 a snapshot of reverse mortgage complaints from December 2011 to 2014. According to the report, many older consumers and their families are confused and frustrated by the terms and conditions of such mortgages.
Reverse mortgages allow homeowners, 62 and older, to borrow against the accrued equity in their homes. Unlike traditional mortgages, reverse mortgages do not require borrowers to make monthly mortgage payments but do require borrowers to undergo housing counseling before they sign for the loan.
The snapshot reported that, according to the National Reverse Mortgage Lenders Association (NRMLA), homeowners aged 62 and older hold a combined $3.84 trillion in equity in their homes.
Approximately 41 percent of Americans aged 55-64 have no retirement savings account. For those who do, the median account balance is only $103,200. An increasing number of Americans also are retiring without pensions.
“Accrued home equity, therefore, will likely play an increasing role in supplementing retirement income in the future for many older homeowners facing a shortfall in income,” the CFPB said.
CFPB handled approximately 1,200 reverse mortgage complaints, which comprised about 1 percent of all mortgage complaints, regardless of age, submitted to the CFPB. Based on the CFPB’s findings:
- 38 percent of complaints concerned problems when the borrower was unable to pay (loan modification, collection, foreclosure),
- 32 percent concerned issues with making payments (loan servicing, payments, escrow accounts), and
- 18 percent centered on issues applying for the loans (application, originator, mortgage broker).
Two other issue categories included issues with signing the agreement (settlement process and costs), which represented 10 percent of complaints, and issues with receiving a credit offer (credit decisions, underwriting), which was only 3 percent of complaints.
“Many older consumers and their family members who submit complaints demonstrate confusion about the terms and requirements of reverse mortgage loans. For example, many of these consumers are frustrated when they are unable to refinance their loans because there is insufficient remaining equity in their homes. These complaints suggest that some homeowners may not understand that the loan proceeds as well as the accrued interest on the loan overtime will substantially decrease the amount of available equity,” according to the snapshot.
A common complaint centered on consumers’ wishing to add additional borrowers to the loan in order to extend its term.
“Adult children of reverse mortgage borrowers also submit complaints describing frustration that lenders refuse to add them to the loan as an additional borrower or allow them to ‘assume’ the reverse mortgage loan for an aging or deceased parent. These complaints often stem from confusion about loan terms and requirements,” the snapshot reported.
“These complaints reflect the difficulties some families encounter when a reverse mortgage borrower dies while non-borrowing family members are living in the home at the time of the borrower’s death. Some family members in multigenerational households tell the CFPB they did not realize until the lender contacted them after their parents’ death that the home would be sold.”
This problem also has affected the surviving spouses of borrowers. Some consumers reported to the CFPB that loan originators falsely assured them they would be able to add the other spouse to the loan at a later date. The U.S. Department of Housing and Urban Development (HUD) issued in April 2014 a mortgagee letter that stated that non-borrowing spouses that meet certain conditions may remain in the home after the death of the borrower spouse for home equity conversion mortgage loans originated after Aug. 4, 2014.
Under a more recent (Jan. 29) change introduced by HUD, servicers will have the option to either call the loan due and payable, or assign eligible loans to HUD granting non-borrowing spouses a repayment deferral upon the death of a borrowing spouse.
According to the snapshot, consumers also complained that loan servicers made repaying the loan difficult. If the borrower or heirs wish to keep the home, they must pay the loan balance in full, or 95 percent of the property’s current appraised value, whichever is lower (24 CFR 206.125(c)). The debt also can be settled by selling the home or transferring a deed in lieu of foreclosure. If the borrower or heirs take no action, the lender can foreclose on the home.
The CFPB stated that loan servicers are required to notify the borrower or the borrower’s heirs within 30 days of a reverse mortgage entering due and payable status. The notice must describe the options for paying the loan balance.
“Consumers complain that loan servicers and lenders do not provide a clear process for paying off reverse mortgage debt. Some consumers describe problems with the appraisal process such as lengthy delays, improperly performed appraisals, and inflated appraised home values,” the snapshot reported. Problems with appraisals usual delay the repayment process for borrowers and their heirs, thus increasing the repayment amount by extending the time in which interest accrues.
“Similarly, an over-valued home unfairly increases the amount required to repay the reverse mortgage debt,” it stated.
The CFPB began its consumer response operations in July 2011, and since that time has released snapshot of consumer complaints of various financial products and services, including credit reporting, debt collection, student loans, and complaints from veterans.
“(Consumer complaints) enable us to listen to, and amplify, the concerns of any American who wants to be heard. They are also our compass, and make a difference by informing our work and helping us identify and prioritize problems for potential supervisory, enforcement, and regulatory action,” CFPB Director Richard Cordray wrote in the Consumer Response Annual Report released in March 2014.