October 22, 2017

States Move To Protect Seniors Considering A Reverse Mortgage With Face-To-Face Interviews

The nonstop ads on cable television make it sound like reverse mortgages are the magical solution to every financial problem faced by the elderly.  Reverse mortgages are, in fact, the most complex mortgage product out there.  Most seniors probably don’t fully comprehend what they are getting into with a reverse mortgage unless they possess a high degree of financial sophistication.

Many elderly homeowners who took out reverse mortgages are now in foreclosure and risk losing their homes.  According to a summary issued by HUD last year, reverse mortgage delinquencies  have skyrocketed by over 200%.  More than 5% of reverse mortgages are in technical default and possibly 20% of reverse mortgages may not  be in full compliance with loan terms.

Some of the biggest and most respectable banks in the country have exited the reverse mortgage program due to the high default rate and bad publicity that results when banks have to foreclose on an elderly delinquent reverse mortgage borrower.  The FDIC has also issued a warning to the elderly in their Consumer News report to be alert for abusive or criminal scams related to FHA reverse mortgages.

If reverse mortgages are potentially a financial disaster for elderly homeowners and if major banking institutions have stopped doing reverse mortgages since they consider them a potentially inappropriate financial product for the elderly, why are reverse mortgages being so heavily marketed by the lenders still doing reverse mortgages?  You can’t watch cable TV for 10 minutes without seeing “good ole boy” Fred Thompson hawking reverse mortgages to seniors as the solution to all of life’s financial problems.  Of course, none of the ads mention the potential financial dangers of a reverse mortgage.   The reason reverse mortgages being so heavily marketed to seniors is because they are extremely profitable to the lenders.  Buyers beware – we all know the old saying “if something sounds to good to be true, it usually isn’t.”

Some States that are concerned with protecting elderly consumers from abusive practices relating to the reverse mortgage program have stepped forward with new consumer protection legislation.  Massachusetts has passed a law that will require face-to-face interviews with certain reverse mortgage applicants and a state approved housing counselor.  The new law, however, will not take affect until August 1, 2014.

The new Massachusetts law requiring face-to-face interviews will only apply to reverse mortgage applicants who at the time of application:

  • Have a gross income less than 50% of the area median income
  • Possess assets of less than $200,000, excluding the value of the primary residence

Right or wrong, lawmakers seem to taken the position that higher net worth individuals are more financially sophisticated and do not need a face-to-face interview with a housing counselor.

The penalty for not complying with the new face-to-face interview law is severe.  In addition to penalties, if a borrower executes a reverse mortgage without the mandated counseling, the terms of the reverse mortgage will be rendered unenforceable.  The new law also protects elderly consumers by requiring a 7 day “cooling off period” after the issuance of a written commitment before the loan can be closed.