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Are Reverse Mortgages Safe for Seniors?

Ah, the reverse mortgage battle continues…Consumers Union says their risky and dangerous; RetireSafe, a grassroots organization that advocates on behalf of seniors says they provide financial independence to Seniors…so who’s right?

Dennis Norman St LouisFirst off, I have to say that I personally feel reverse mortgages offer an excellent opportunity for seniors to live a better life, or get them through a tough financial period, by tapping the equity in their homes. I have written before about a friend of mine, Tom Carter, who has helped dozens of seniors over the years with reverse mortgages. Having said that, obviously, like almost everything in life, this is something that can be mis-applied or can be used in the wrong manner by low-life’s looking to scam a senior citizen.Consumers Union Warns of Big Risks for Seniors with Reverse Mortgages…

Earlier this week the Consumers Union (part of Consumer Reports) issue a report titled “Reverse Mortgages Can Come with Big Risks and High Costs for Seniors“. In their report they state that “they have concerns that an increasing number of seniors are being misled into signing up for a complicated financial product that may squander their equity prematurely or put them at risk for losing their homes.”

The report state the market for reverse mortgages is growing fast as the baby boomer generation reaches retirement age. Reverse mortgages enable borrower who are 62 or older to lump-sum cash, or monthly income, from the equity in their home without selling.

The concerns noted by the report include:

  • Misleading marketing claims: Borrowers can be duped by misleading marketing claims.
  • Seniors are particularly vulnerable to misleading marketing: Recent research has indicated that seniors are particularly susceptible to fraudulent marketing. University of Iowa researchers concluded that 35-40 percent of elders studied had impaired decision making abilities that made them especially vulnerable to misleading advertising.
  • Cross promotion of other unsuitable financial products: Seniors are also targeted with aggressive cross promotion of other financial products like long term care insurance or annuities that may not be suitable for them. While lenders and brokers selling HECM loans are prohibited from promoting annuities or insurance, insurance agents can legally direct senior clients to get a reverse mortgage to fund insurance products.
  • Reverse mortgage defaults are triggering foreclosures: HUD’s Office of the Inspector General found that an increasing number of borrowers had defaulted because they had not paid their taxes or homeowners insurance premiums as required. As of March 2010, 20,631 reverse mortgage loans were in default. Reverse mortgages are likely to generate an even greater number of foreclosures when borrowers die and their heirs are not able to take possession of the home by paying off the mortgage.
  • Reverse mortgage loan bailouts are on the rise: A Consumer Reports investigation found more cause for concern: loan bailouts have soared. The annual sum of reverse mortgages taken over by a federal insurance fund has more than quadrupled in four years, from $81.3 million in 2004 to $381.3 million in 2008.

The Other Side of the Coin…

Yesterday, in response to the Consumer Union report, RetireSafe and The Coalition for Independent Seniors released a report disputing the findings of the Consumer Union Report. For starters, these two groups claim that the Consumer Union report is “based on dated information that has appeared in previous Consumers Union reports and does not take into account the consumer protections adopted by the industry in recent years, including: a law banning cross selling of additional financial products; stronger requirements for financial counseling; regulations against deceptive advertising; and consumer protections that prevent Seniors from losing their homes.”

“Seniors should know that reverse mortgages are sound economic tools that allow them to leverage their own wealth to continue to support themselves and live in their homes longer. The Consumers Union report does a disservice to seniors by repeating myths about the program. The reality is, the reverse mortgage program is government-backed and heavily regulated by FHA to protect consumers and their interests,” said Jeff Lewis of the Coalition for Independent Seniors. “It simply is not fair to say that 26 instances of questionable practices among over 2000 lenders nation-wide is reason not to explore reverse mortgages to help you meet your financial needs.”

Thair Phillips, President of RetireSafe, a 400,000-supporter strong national advocacy group for older Americans, believes that reverse mortgages are an important option for seniors. He said, “Having a financial option that allows seniors to remain in their homes is a godsend to our members who have obtained reverse mortgages in these troubled financial times. Seniors don’t want to depend on the government but would rather use the equity they worked so hard to build up in their homes as a way to remain in their home and continue their older years in dignity.”

“We have a good product, seniors like it and it benefits the seniors, their families and society as a whole,” said Lewis. “Consumers Union didn’t talk with lenders or borrowers before issuing this report. If they had they’d hear what we hear from seniors – that the program has given them the financial independence they want and the ability to meet unexpected expenses and continue to live in their homes.”

AARP Survey of Reverse Mortgage Shoppers…

Back in 2007 AARP did a survey to “provide the first detailed look at consumer interest in reverse mortgages, consumer experiences with lenders and counselors…”. The findings in their report clearly cast reverse mortgages in a positive light in my opinion. The AARP survey results include:

  • 93 percent of borrowers in the survey reported that their reverse mortgage had had a “mostly positive effect” on their lives.
  • 3 percent of borrowers said the effect was “mostly negative” and 2 percent said the effect was “mixed”.
  • 63 percent of borrowers in the survey said they would be “very likely” to recommend a reverse mortgage to a friend and 26 percent said they would be “somewhat likely” to make the recommendation.
  • 3 percent said they were “not too likely” to recommend a reverse mortgage to a friend and 5 percent said they “were not at all likely” to make the recommendation.

Conclusion..

For those readers that are still awake and haven’t lost interest in this topic yet…I am going to close saying that my feelings about reverse mortgages have not changed. I still believe they are a good product for Seniors if their circumstances are such that they would truly receive benefit from a reverse mortgage. I think the ARRP survey results clearly show that problems with Reverse Mortgages are the exception, not the rule.

I also believe that that Jeff Lewis’ comments above about the flawed data in the Consumer Union report is probably accurate. I have followed reverse mortgages for some time now and have seen regulatory changes, and industry changes, in the past few years that, like Lewis, I believe have made some of the concerns expressed in the Consumer Union report a non-issue.

Of course, as in all important and financial matters, seniors should be cautious about who they do business with as their are bad apples in all industries.

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