Reverse mortgages have emerged as a popular, albeit controversial, means for senior citizens to acquire cash by utilizing the value of their houses as collateral for a loan. As the American population ages, a rise in reverse mortgages has been predicted. However, these mortgages are dangerous products that the target market—older individuals who sometimes live on a limited budget—might not completely grasp. As a result, lenders are required by regulators to provide specific disclosures to borrowers of reverse mortgages.
Disclosures do not, however, always exclude the danger of predatory or misleading lending. The federally supported reverse mortgage system may need to be changed, according to some advocacy organizations. Consumer Advocates Against Reverse Mortgage Abuse (CAARMA) is one such group. They specifically contend that “thousands and thousands of heirs are blocked from fulfilling the reverse mortgage debt,” leading to lost inheritances, and that half of surviving non-borrowing spouses will not be allowed to remain in their house once the borrowing spouse passes away.
- Reverse mortgage lenders are required by federal and state law to provide potential borrowers with certain disclosures.
- Frequently, borrowers are also required to complete reverse mortgage counseling, and it may be necessary to do so before costs may be levied.
- Some consumer advocates contend that in order to adequately safeguard elderly homeowners, the federally insured mortgage system has to be changed.
Disclosures Under Federal Law
Lenders of reverse mortgages have various restrictions on what they can and cannot do, but they also have obligations.
Reverse mortgage lenders are prohibited by federal law from engaging in “unfair or misleading” tactics. Reverse mortgages are covered under Section 5 of the Federal Trade Commission Act, for instance. For example, it is illegal to mislead or lie to prospective borrowers about the conditions of a reverse mortgage loan. Additionally, lenders aren’t authorized to misrepresent the source of their services or use the Federal Housing Administration (FHA) emblem.
In addition, reverse mortgage applicants must receive particular disclosures from lenders in accordance with Regulation Z of the Truth in Lending Act (TILA). These consist of:
- a warning that, even if an application has been signed, you’re not obligated to proceed with a reverse mortgage simply because you’ve shown interest in one.
- a good faith estimate (GFE), a document the lender offers to outline the basic terms of the loan. It is intended to enable you to compare loans or get an idea of how much the loan will truly cost.
- An itemized breakdown of the loan, including the interest rate, fees, terms, house appraisal values, and the youngest borrower’s age.
- a description of the total annual loan cost (TALC) table’s rates. According to explanations of TALC computations, the table provides the annual percentage cost of a reverse mortgage based on predetermined loan terms and projected yearly housing appreciation.
Consumers are safeguarded by Regulation Z against deceptive activities by the credit sector and are given accurate information about the costs of credit.
Disclosures Under State Laws
Additionally, customers who use reverse mortgages are protected by state law.
According to Amy Loftsgordon, an attorney at Nolo, states have started to enact regulations to shield senior citizens from misleading advertising over time. For instance:
- Maryland has made it mandatory for lenders to provide prospective borrowers with a checklist that suggests they contact a reverse mortgage counseling organization.
- Washington mandates that a notice informing prospective borrowers that they must attend counseling before obtaining a reverse mortgage be issued to them, following certain requirements.
- In California, there is a required “cooling down” period of seven days. A prospective borrower must wait at least seven days after the required counseling session before the lender may charge fees.
Are Disclosures Actually Being Made?
There may be an upward trend in reverse mortgage defaults. A 2019 Government Accountability Office (GAO) investigation found that an increasing number of home equity conversion mortgages (HECMs), the most prevalent and only form of reverse mortgage that is federally guaranteed, had failed. According to the data, HECM defaults increased from 2% of loan terminations in 2014 to 18% in 2018. According to the research, this was mostly brought on by borrowers failing to fulfill occupancy rules, pay taxes, or get insurance.
The GAO study also identified a number of flaws in the FHA program that regulates HECMs, emphasizing the need for more monitoring to ensure that loan servicers are abiding by rules meant to safeguard consumers.
Litigation may also be on the rise. Reverse mortgage cases have been more common in recent years, according to attorneys in areas like West Virginia.
Although there have been several reports of dishonest lenders, it is unknown from outside the sector what proportion of lending is dishonest. According to a 2019 USA Today investigation, for instance, approximately 100,000 loans were allegedly foreclosed upon in a “stealth aftershock of the Great Recession,” depressing the value of whole neighborhoods—mostly Black, urban, and underprivileged—across the country. Within the reverse mortgage sector, there was debate concerning that inquiry.
Does a reverse mortgage affect your heirs?
Of course it can. Repayment of the reverse mortgage may begin at the demise of the borrower. The rest of the loan or 95% of the home’s assessed worth, whichever is lesser, must be paid back by your heirs. After receiving a notification from the lender, your heirs have 30 days to take action or forfeit the property.
What is prohibited in reverse mortgage advertising?
Lenders are prohibited from using official government emblems or claiming that the federal government has co-signed or otherwise authorized their wares.
How are reverse mortgages paid back?
Frequently, the proceeds from the sale of the house will be used to repay the reverse mortgage.
The Bottom Line
Federal and state regulations require reverse mortgage lenders to provide certain information to borrowers. The disclosures are intended to provide the borrower with information on reverse mortgages and the procedures involved with them. At the state level, they often include a warning that the borrower will need to participate in counseling. To be eligible for a HECM loan with government backing, counseling is also necessary. However, consumer protection groups and legal experts caution that reverse mortgages may be fraught with obfuscation and dishonest business practices, making them unsafe for senior citizens wishing to utilize them to access the value in their houses.
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