As more and more boomers reach retirement age, the need
for them to create retirement income will become more acute. This is especially
true for the 41 percent of Americans between the ages of 55 and 64 who have no
retirement savings at all. Without funds stashed away, many will turn to their
home equity to produce income, either by refinancing their original mortgage, taking
out a home-equity loan or line of credit, selling their home and downsizing, or
obtaining a reverse mortgage.
The latter option seems logical, yet for years consumers
have been mystified by these offerings, and their advisors have had a love hate
relationship with them. So it’s not surprise the reverse mortgage market is
only 1 percent of the traditional mortgage market, with 628,000 outstanding
loans. And growth may not come easy, since the Consumer Financial Protection
Bureau (CFPB) recently release a report indicating the top complaints consumers
file about reverse mortgage: loan terms, servicer runarounds, and foreclosure
problems.
Seniors watch a third more TV than other adults, and every
time they turn on the set there's a good. To this end, CFPB has produced a new
consumer advisory that highlights three ways that borrowers can
protect their heirs once the loan comes due. As for complaints, CFPB says its
study revealed a big disconnect between consumer expectations and how reverse
mortgages actually work. For example, the top three complaints included:
1. Distress about the
inability to add new borrowers to an existing loan
Reverse mortgages prohibit spouses, heirs, and dependents
from taking over the loan because loan amounts are, in part, calculated using a
borrower’s age and the loan repayment is triggered when the last borrower moves
out or dies.
2. Frustration with
runarounds when trying to pay off the debt
When the borrower dies, heirs can sell the home, repay the
loan balance, or pay 95 percent of the property’s assessed value. Consumers
complained that loan services do not provide a clear process to allow them to
settle the debt and that appraisal delays, incorrect appraisals, and inflated
home values increased their payments.
3. Struggles with
foreclosures due to problems with property taxes and homeowners insurance
Reverse mortgages require no monthly mortgage payments, but
borrowers are still responsible for property taxes and homeowner’s insurance.
Consumers sometimes fail to pay these expenses and get threatened with
foreclosure. But their efforts to get caught up sometimes fail to halt the
foreclosure process.
Guidance from the National Ethics Association: If you
are involved with home equity conversions, obey the letter of law regarding
Federal Housing Administration (FHA) regulations, comply with all loan
suitability provisions, and make sure your clients fully understand the
workings of these complex arrangements. Doing your homework up front will
prevent compliance and errors-and-omissions headaches down the road, not to
mention a retirement nightmare for your clients.
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