Thursday, June 28, 2012

CFPB talks Reverse Mortgages

Posted By on Thu, Jun 28, 2012 at 9:18 AM

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Reverse Home mortgages have the potential to be very useful tools for retirees looking to access their home equity, or a huge source of financial stress. Although Hurricane Debbie rained out a field meeting Wednesday in Tampa, the Consumer Financial Protection Bureau held a conference call discussing the benefits and pitfalls of reverse mortgages.

CFPB is an agency formed in 2011 to educate consumers when making financial decisions and protect against fraud and predatory lending practices.

“A reverse mortgage alone is a complicated financial instrument, and people have a lot of difficulty understanding them,” said Skip Humphrey, assistant director of the office of Older Americans at the bureau.

Director Richard Cordray explained the Reverse Mortgage as a special type of loan for homeowners over 62. Basically they can borrow against the equality of their home, but instead of paying down the loan overtime, the loan balance gets larger. Repayment is deferred until the homeowner dies, or sells or moves out of the house. Borrowers can opt to get their money in the form of monthly payments, a line of credit or a lump-sum payment.

This can be a particularly attractive option for retired seniors who need supplemental income. But Cordray said that it can be misused in ways that could financially harm the borrower. A report by the CFPB indicated that people that take out reverse mortgages are doing so at a relatively young age, most commonly at 62, the first year of eligibility. This becomes an issue because paired with a longer life expectancy, it becomes more likely that events might happen where the borrower might have to leave the house.

The report also indicated that 2 out of 3 people opt to get the loan as a lump sum. Cordray said that this trend could leave homeowners struggling to pay insurance and property taxes later on .

“Consumers who tap out all their accessible home equity at a relatively young age could have fewer resources later in life, said Humphrey. A senior homeowner with a sudden large amount of money could also be targeted by shady salespeople and scammers.

A CFPB official said that the market for reverse said that the market for reverse mortgage started growing in the early 2000s but peaked around 2009 at about 155,000 loans a year. Although occupying a small part of the lending market at about %3 percent, it could become more popular as millions of aging baby boomers become eligible, added Cordray.

Whether a reverse mortgage is the right decision is dependent upon the situation, added Cordray. A CFPB official added that the agency has several initiatives in place to educate those considering reverse mortgages, such as a consumer guide, hotlines to report scams and predatory lenders, and a FAQ section on the CFPB website.

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