Loans have been a staple of human survival for thousands of years. Goods, services, money, even household belongings have traded hands and deals have been struck since the dawn of civilization. Reverse mortgages, on the other hand, are a comparatively new addition to the financial landscape. Signed into law by President Ronald Reagan in 1988, reverse mortgages (technically known as the Home Equity Conversion Mortgage, or HECM) have been one of the more hotly-debated and controversial loan options ever since their advent. Due to the commonly-held belief among some financial analysts and consumers that reverse mortgages are inherently dangerous and predatory, it is extremely important that they be advertised within the rigid confines of the law. There is very little wiggle room or gray area when it comes to explaining their rights and limitations if and when considering a reverse mortgage and the penalties for steering them wrong can be severe.
Simply put, a reverse mortgage is a loan taken out against the equity in one’s home. If a homeowner still owes $100,000 in mortgage payments on a home, but that property’s fair market value is $300,000, the homeowner is considered to ‘own,’ or have equity of, $200,000 worth of the house. Reverse mortgage loans can only be utilized if the homeowner owns their house outright or has a very low existing mortgage balance. As such, only homeowners 62 years of age and older are eligible. For those seniors who need an influx of cash due to the death of a spouse or some other major life change, but are on a fixed income from a pension or similar income, a reverse mortgage may be the answer. Now instead of the homeowner making payments to the lender, the lender now makes cash payments to the homeowner. However, as this is a loan, every cash payment that the homeowner receives decreases the equity in their home. In essence, their payments are now being refunded, which incrementally lowers their stake in the property.
As said, for financially unstable seniors worried about paying the bills, reverse mortgages *may* seem like the lifeline they’ve been dreaming of. But there are many ancillary considerations that a servicer must clearly share with a prospective customer or risk violating UDAAP (Unfair, Deceptive, or Abusive Acts or Practices). As with any other loan, fees and costs will be involved when securing the loan. The homeowner is still liable for property tax, insurance, maintenance, and other related home expenses, even though they are receiving cash payments from their equity. The more money a customer receives via their reverse mortgage, the more interest is added to their balance. Interest rates and fair market values fluctuate with time and the balance may change periodically due to these fluctuations, which are out of the control of either the customer or servicer. Reverse mortgages can also drain the equity from your home, which can severely diminish or even completely erase the value of the property if inherited by a customer’s heirs upon their death. A mismanaged reverse mortgage can leave a customer’s children or other beneficiaries holding the bag after they’re gone.
How can this happen? Possibly the most prevalent and insidious way is a loan officer, broker, or other servicer simply not sharing the whole list of pros and cons of a reverse mortgage with a prospective client. An aging cash-strapped customer needing speedy financial stability and a disreputable loan officer desiring a quick commission can be a recipe for disaster and shocking non-compliance. As stated above, reverse mortgages aren’t so simple as signing some documents and waiting for the checks to roll in. There are many associated fees and issues to consider and reverse mortgages are not the right option for each and every situation. Another method by which unscrupulous servicers might sign up customers for a reverse mortgage is false pretenses. In other words, unethical loan officers or even people posing as loan officers have been known to prey on the elderly - who may be more susceptible to promises of quick wealth and security - with false promises or bald-faced scams. For example, a fairly common deception is for a false website or storefront to advertise low or no-payment mortgages through the Department of Veteran Affairs (VA) in an effort to sign an eligible homeowner into signing fictitious documents or sending in a ‘deposit’ as a good faith payment to secure said reverse mortgage loan. The VA does not offer reverse mortgages of any kind. Any advertising or marketing claiming to offer VA reverse mortgages is categorical fraud.
Another method by which some servicers have deceived potential customers into pulling the trigger on a reverse mortgage has been dishonest number crunching. In October of 2021, American Advisors Group (AAG) was fined over one million dollars by the CFPB by purposely inflating customers’ home values, thus leading them to believe that they would be able to make use of more equity than they actually would. AAG’s publicly-advertised materials specifically claimed that the company would make every effort to ensure the home value information they provided to their clients was reliable. But in fact, their property value inflation was a systematically deliberate ruse designed to get customers in the door and falsely promise returns on their equity that could not be realistically delivered. Including these and similar dubious claims in advertising and marketing materials, along with misrepresenting borrower risks and requirements, are how deceitful and dishonest companies or individuals muddy the waters and make it more difficult for the average prospective client to understand what a reverse mortgage can really and truly deliver.
As the old courtroom idiom goes: tell the truth, the whole truth, and nothing but the truth. Make sure that your customer understands what they are getting into, that the cash they are receiving may be a godsend, but is slowly (but surely) depleting their equity in their home. Disclose in advertisements any fees and other accompanying charges that may be involved, just like any other loan product.
A 2013-2014 study by the CFPB highlighted several points of confusion from eligible seniors when it came to reverse mortgages. Many expressed puzzlement over what they perceived to be incomplete information, endorsements from ‘trustworthy’ popular figures who they believed would not agree to appear in commercials for a hazardous product, and some were even unaware that reverse mortgages are, in essence, loans against a paid-for home. Some found it difficult to read the fine print, so they didn’t even bother, and others believed that reverse mortgages are “government-backed” (and therefore credible and beyond reproach) because of official-looking seals and logos.
The U.S. Department of Housing and Urban development (known as HUD) issued a Mortgage Letter in 2014 providing guidance on HECM advertising, specifically requiring that “All advertisements or marketing materials used in connection with the HECM program for the purpose of describing and illustrating, to the public the types of loan products offered by the mortgagee must include a disclaimer that clearly informs the public that such materials are not from HUD or FHA and the document was not approved by the Department or Government Agency. The disclaimer must be displayed in a conspicuous location”.
In other words, many seniors do not understand the possibilities or pitfalls of reverse mortgages because they do not know what is true and what isn’t regarding a reverse mortgage’s capabilities and limitations. The safest way to keep yourself and your company out of regulatory hot water is to handle reverse mortgages like any other financial product: authentically and ethically help your customers get up to speed with straightforward, no-nonsense information and assist them in making a savvy and smart decision concerning their financial well-being. If handled with the appropriate level of care and concern, it can be a decision that will hopefully help protect their nest egg - and their home - today and for many years to come.
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