This case points to pitfalls in reverse mortgages

Contending that seniors were misled into a false sense of security, the government’s consumer watchdog this week slapped fines and sanctions on three reverse mortgage lenders, including the nation’s largest such lender, American Advisors Group. The action is a reminder of the pitfalls that reverse mortgages can have for borrowers, despite their potential benefits.

In this case, American Advisors and the two other companies -- Reverse Mortgage Solutions and Aegean Financial -- often used trusted celebrity spokespeople, including the late Senator Fred Thompson, and made false advertising claims to lure seniors into these complex and costly consumer loans, government officials said.

“These companies tricked consumers into believing they could not lose their homes with a reverse mortgage,” said Consumer Financial Protection Bureau Director Richard Cordray. “All mortgage brokers and lenders need to abide by federal advertising disclosure requirements in promoting their products.” 

The CFPB ordered the three lenders to make “clear and prominent” disclosures, and American was fined $400,000, RMS was fined $325,000 and Aegean was fined $65,000.

All three companies falsely claimed in both published ads and via telemarketing calls that taking out a reverse mortgage would not jeopardize the borrower’s ability to remain in the home nor the consumer’s ability to retain ownership of the home. In addition, each of the three companies also engaged in some unique and misleading claims, according to the CFPB.

Aegean Financial, for example, intimated in Spanish language ads that the company was affiliated with the federal government. It also falsely claimed that consumers wouldn’t be subject to any refinancing costs, when in fact, consumers pay a number of fees when taking out a reverse mortgage.

Reverse Mortgage Solutions attempted to create a false sense of urgency, using a telemarketing script that prompted seniors to call back “before the close of business,” or they would “miss out on a tremendous money-saving opportunity.”

American Advisors Group contended that consumers would have the right to stay in their homes for life, without monthly payments and that a reverse loan could eliminate all the consumers’ debts. Actually, however, a reverse mortgage is a debt, and it could trigger a foreclosure or forced sale during the consumer’s lifetime.

Of the three companies, only American Advisors Group responded to a request for comment. Chief Excecutive Reza Jahangiri said the company takes its regulatory responsibilities seriously and conforms with all laws and regulations, but that its ads evolve as the company comes to “better understand how the rules are interpreted.”

In reality, reverse mortgages can be a valuable tool for seniors who are house-rich and cash poor. However, they’re complex products and present numerous fees and hazards to both seniors and their heirs. Let’s take a look at how they work and their pros and cons.

What are reverse mortgages?

They’re loans, insured by the federal government, that allow homeowners who are over the age of 62 to tap home equity without the need to make immediate monthly payments. In most cases, the balance of the reverse mortgage will become due and payable only when the senior moves or dies.

How can a reverse mortgage jeopardize a senior’s ability to remain in his or her home?

Although borrowers generally aren’t required to make monthly payments on the loan, homeowners must keep their homes in good condition and pay their property taxes and insurance. If they fail to do any of those things, the loan could go into default. 

Default triggers the need for immediate repayment, potentially forcing the senior to sell or face foreclosure. Additionally, if just one spouse takes out a reverse loan, the other spouse could be forced out of the home when the borrowing spouse dies.

What costs are associated with a reverse mortgage?

They vary, but include credit report fees, flood certification fees, title insurance and appraisal costs, as well as loan origination and mortgage insurance fees. It’s not unusual for the cost of a reverse loan to exceed $10,000. You can get an estimate of fees and the loan amount you could qualify for by using the National Reverse Mortgage Lender’s Association’s calculator.

When would a reverse mortgage make sense?

Those who have substantial equity in their homes but find themselves short of cash to live on, can use a reverse mortgage to use some of that equity. This would make sense when a senior wants to remain in his or her home for life but has continuing or one-time expenses that are otherwise unaffordable.

Reverse mortgages can be taken out in three ways: via a monthly stipend that lasts for a set period, which can range from a few years to the rest of the borrower’s lifetime; via one-time lump sum; or as a line of credit that can be tapped as needed.

When does a reverse mortgage not make sense?

When you have sufficient liquid resources to pay your bills or when you’re willing to sell the home to tap your equity. If you believe you’ll sell your home in your lifetime, a reverse mortgage is often an expensive way to cover short-term liquidity needs.

Additionally, those who hope to leave their homes to heirs may also want to think twice. Although heirs can theoretically still inherit the home, they would have to repay the reverse mortgage before they could gain title. Moreover, consumers have complained about bureaucratic delays and snafus when they attempted to pay off reverse mortgages after a parent’s death.

Where can I learn more about reverse mortgages?

AARP has a good guide to reverse mortgages on its website. The CFPB also offers reverse mortgage information and tips, as well as answers to common consumer questions.