FHA Reverse Mortgage Amendment Fails to Make Final Senate Bill

by Karen Lawson
May 24th, 2010
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A proposed amendment by U.S. Sen. Claire McCaskill offering enhanced consumer protection for reverse mortgages failed to make the version of the financial reform bill that passed the Senate last week. McCaskill’s amendment was in response to questions about the safety of reverse mortgages for seniors. What are the risks of reverse mortgage loans, and are FHA reverse mortgages–also known as home equity conversion mortgages, which make up the vast majority of reverse mortgages–safe for consumers?

Consumer Reports suggests that consumers get tripped up when taking out reverse mortgages without fully understanding how these loans work.

FHA Mortgage Loans: Protecting FHA Reverse Mortgage Borrowers

FHA insures reverse mortgage loans and and has outlined requirements for borrowers and mortgage lenders that are designed to assist reverse mortgage borrowers with making informed decisions and avoiding mortgage default. Although borrowers don’t make payments on reverse mortgages, they can be foreclosed on if they don’t honor the terms and conditions of their reverse mortgage.

Reverse mortgages are one way for seniors to tap an asset for needed cashflow, but these are transactions that may be misunderstood by borrowers. However, some lenders’ practices have raised concerns; typical criticisms about consumer protections for reverse mortgages include:

  • Misleading marketing: Advertisements encouraging seniors to take out reverse mortgage loans for “enjoying the good things in life” can lead to trouble. With many homes losing value, borrowers risk running out of equity and may also incur hefty fees. Unscrupulous sales tactics can include appealing to borrowers’ emotions rather than their financial needs.
  • Selling additional financial products with a reverse mortgage: Reverse mortgages allow borrowers to draw out lump sums of cash, or to draw on their home equity as needed. This provides a perfect set-up for scam artists offering financial products that may not be appropriate for reverse mortgage borrowers.
  • Inadequate borrower information and counseling: Although FHA requires all reverse mortgage borrowers to receive specialized counseling about reverse mortgages, the information provided may be inadequate. Meanwhile, mortgage lenders may promote the advantages of reverse mortgages without adequately addressing potential risks.

FHA Mortgage Loans: Reverse Mortgage Lending and Responsibility

With mortgage lenders bearing little risk when FHA insured reverse mortgage loans go south, FHA has the incentive to shore up its loan requirements for these potentially risky mortgages. Enhancing its housing counseling programs for reverse mortgage loans, and holding lenders accountable for lax or unscrupulous practices can help protect senior homeowners. I’d also like to see a mandatory “cooling off” period applied to reverse mortgage loans; this would allow borrowers an opportunity to think things over and to withdraw their application for a reverse mortgage if they change their minds.

FHA should actively prosecute those committing fraud or other unscrupulous activity related to FHA reverse mortgage loans. If legislators can’t provide strengthened consumer protection for reverse mortgage loans, then FHA should be allowed to tighten its own loan requirements for its reverse mortgage loan program–while keeping this financial product available to those seniors for whom a reverse mortgage is the right choice.

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