Are Reverse Mortgages Predatory?

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Are Reverse Mortgages Predatory?

Homeowners who are at least 62 years old and have paid off at least 50% of their initial mortgage total may borrow against the equity in their house via a reverse mortgage.

You don’t have to meet certain income or credit score requirements for a reverse mortgage, unlike other options to access equity like a cash-out refinancing, home equity loan, or home equity line of credit (HELOC). Additionally, there are no monthly loan payments required. Instead, you pay back the loan when you permanently leave your current residence, regardless of whether you are going to a new house, a healthcare facility, or you have died away.

However, not every elderly homeowner is a good candidate for a reverse mortgage, and some lenders or loan officers may aggressively pitch these loans. Predatory lending takes advantage of the borrower’s ignorance to its own gain at the cost of the homeowner. Predatory lending may turn into a kind of financial elder abuse when it targets seniors.

Key Takeaways

  • Reverse mortgages are complicated by nature, which makes them difficult for most people to comprehend.
  • Even professionals in the mortgage and financial planning sectors lack a thorough understanding of reverse mortgages.
  • To borrow against the equity in their house, homeowners must be at least 62 years old and have paid down at least half of their mortgage debt.
  • Although not all reverse mortgage lenders and loan officers act unethically, those who do prey on the intricacy of the product—along with some older homeowners’ limited finances and deteriorating mental acuity—to offer them a product that is not in their best interests.
  • Due to the lack of a fiduciary obligation to their customers, reverse mortgage lenders may provide advice that is not in the best interests of the homeowner.

Are Reverse Mortgages Predatory?

Not by nature, reverse mortgages are predatory. They are a respectable kind of house loan that presents a special option to senior homeowners looking for an additional source of funding.

They aren’t always a last-ditch option, though. They may assist senior homeowners in diversifying their income streams to lower the likelihood that they would run out of money.

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However, the FBI has found evidence of senior homeowners being duped by loan officers, lawyers, contractors, and investment experts.

Celebrity-focused advertisements and lectures at senior centers and churches may be appropriate approaches to reach this product’s target demographic. However, they may also be used as enticements to persuade elderly homeowners to borrow money against the equity in their homes using a loan product whose terms and conditions they might not fully comprehend.

A number of investigative pieces detailing exploitative tactics in the reverse mortgage sector were published by USA Today in 2019. The news organization discovered that lower-income, mostly Black communities had received a disproportionate number of reverse mortgages.

It also discovered that the foreclosures on these reverse mortgages were lowering the value of surrounding houses and leading to community degradation.

When the last living borrower dies without leaving any descendants who may afford to repay the debt, foreclosure may naturally follow. Additionally, it may take place if a homeowner vacates their house or is in default on their homeowner’s insurance or property taxes.

Before the Federal Housing Administration (FHA) introduced new laws to better safeguard homeowners in 2013, older persons were more likely to lose their reverse-mortgaged houses for these two forms of default.

The USA Today story may have exaggerated some of the risks associated with reverse mortgages of today, but it also highlighted the suffering that these loans have caused to individuals, families, and whole communities, as well as the unethical behavior of certain people in the reverse mortgage business.

Incentives for Predatory Reverse Mortgage Lending

Mortgage loan officers are not always required by law to operate in the best interests of their customers. Higher commissions or quicker promotions might be incentives for them to work in their own and their employer’s best interests. Before a lender recruits them and educates them to work in the sector, they may not even have any expertise in the mortgage industry, much alone with reverse mortgages.

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For instance, having a minimum of four years of sales experience is a requirement to become a loan officer trainee at American Advisors Group (AAG), the nation’s largest reverse mortgage lender.

Although not necessary, industry experience is encouraged. Experience in subprime lending and debt resolution are preferred skill sets. A basic wage and bonuses or commissions are added to the pay. According to a job ad on the AAG website for May 2022, a loan officer trainee may make $90,000 year with perks by completing only four transactions per month.

$38,000

What an American Advisors Group internet article from May 2022 claims a reverse mortgage loan officer can make annually by adding only one extra closure each month.

With each loan they complete, reverse mortgage lenders all have the potential to make several thousand dollars. This cost is set at $6,000 on an FHA reverse mortgage, commonly known as a home equity conversion mortgage (HECM). The lender’s charge for a non-FHA, proprietary (or jumbo) reverse mortgage might be much greater (in part because loan limits are higher).

FHA mortgage insurance, which guards against losing money on reverse mortgages, is another benefit to lenders. When a homeowner moves out permanently or dies away, neither their estate nor their heirs are held liable for the difference if the loan sum is more than the home’s worth. The lender is made whole by the federal mortgage insurance fund.

The upfront mortgage insurance that reverse mortgage borrowers accept together with the monthly mortgage insurance fees that they pay each month that they hold the loan go to this fund.

Even many individuals who work in the financial services sector have trouble understanding reverse mortgages, which is an issue for both lenders and borrowers. It’s possible that the homeowners who hire them don’t fully comprehend what they’re agreeing to.

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Some financial experts may believe that homeowners are adults who can make their own decisions. But the majority of folks lack a high degree of financial understanding.

If homeowners don’t comprehend the product they’re signing up for, they won’t be able to make completely informed judgments. They cannot depend on a loan officer’s sales pitch either since they may not completely comprehend the product and its hazards.

Additionally, many individuals lose their mental sharpness as they age, and some older homeowners struggle to say no, are lonely and isolated, or are extremely trusting. These traits might make them susceptible to financial predators.

What Are Some Solutions to Predatory Reverse Mortgage Lending?

  • mandate the fiduciary status of loan officers.
  • Hold businesses accountable for the unethical actions of their loan officers by imposing harsh fines that serve as a real deterrent to bad conduct and a just penalty for breaching the law.
  • Increase the number of in-person HECM counseling sessions available to avoid bad phone or video connections from causing poor therapy sessions.
  • Conduct public education initiatives to raise awareness of the dangers and frauds associated with reverse mortgages.

How Can Reverse Mortgage Borrowers Avoid Foreclosure?

Can I Change My Mind After I Sign?

The Bottom Line

Although reverse mortgages in and of themselves are not predatory, certain industry employees have marketed and sold them in a manner that is. In the aftermath, some communities—especially Black communities—have lost generational wealth.

The consequences include homeowners and surviving spouses losing the right to live in their own homes due to loan conditions that they didn’t comprehend, as well as distraught adult children who had no knowledge that their parents had reverse mortgaged their property.

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