For older homeowners, it’s ‘borrower beware’
Reverse mortgages, refinance schemes often put seniors at risk
Older Americans are entering retirement with less savings and more debt than in previous generations, putting well-being and housing security at risk for the aging Baby Boom cohort.
The picture is especially troubling for blacks and Latinos, who have earned less income and accumulated fewer assets on average over their working years. In 2013, white families in the U.S. had at least $100,000 more (the equivalent of 7 to 11 times more) in average liquid retirement savings than African American and Hispanic families, according to a recent Urban Institute report. This racial retirement savings gap has widened over the past few decades.
Len Raymond, executive director of Homeowner Options for Massachusetts Elders (HOME), sees a steady stream of Massachusetts seniors with troubles threatening their housing security, from home repair, food and health care costs to property tax liens. His statewide nonprofit financial and housing counseling agency specializes in assisting elders at risk of losing their homes.
“The major problem for seniors is the income/cost gap,” said Raymond. “They’re on small incomes, yet costs are going up.”
He also sees a rise in the number of seniors paying mortgages as well as higher loan balances.
“When we started this work 31 years ago, most [older homeowners] had paid off their homes, or were close to that,” he said. “Today, there’s been serial refinancing, and now they’re overwhelmed.”
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With low savings, rising costs and often strong attachment to their homes and their independence, it’s no wonder that elderly homeowners often look to home equity to cover expenses and pay off debts. And it’s no surprise that lenders and brokers are eager to tap this lucrative market, engaging in, if not outright swindles, aggressive sales tactics that are drawing scrutiny from the Consumer Financial Protection Bureau.
One heavily-marketed product is the reverse mortgage, which allows seniors 62 and older to borrow against their home equity with no loan payments due until they move, sell or die. Reverse mortgages can provide a lifeline to help seniors remain comfortably in their homes, but also can have painful consequences if not fully understood by borrowers and heirs.
In television ads, aging celebrities serve as trusted spokespeople for mortgage brokers and lenders.
“I’m Henry Winkler, and I’m here to tell homeowners 62 and older about a great way to live a better retirement. It’s called a reverse mortgage,” begins one TV spot featuring the former Fonz. The screen flashes phrases like “tax-free cash” and “trusted experts.” Winkler exhorts seniors to “take control of your retirement today.”
Attorney Betsey Crimmins directs the Elder Abuse Prevention Project at Greater Boston Legal Services. She notes that a reverse mortgage can be a “great vehicle” for a small slice of the elder population, but cautions it is a complex product ripe for financial exploitation. For instance, her agency sees unwary elders facing foreclosure after being coaxed to take a reverse mortgage’s easy cash but then lapsing on the required monthly insurance and tax payments. In other cases, elders didn’t realize that a non-borrowing spouse — who perhaps wasn’t 62 at the time of the loan — could suddenly be on the hook for full repayment when the spouse who signed the loan dies.
The U.S. Department of Housing and Urban Development (HUD) has instituted new reverse mortgage rules over the past year. They require a credit and income assessment to up the odds that borrowers can afford taxes, insurance and home maintenance; limits on the size of upfront lump-sum withdrawals; and protections against eviction of non-borrowing spouses.
Still, advocates see continued potential for trouble, especially as banks have largely pulled out of the reverse mortgage market and lesser-known brokers have taken up the territory.
“So much of the marketing just feels really wrong. There’s a lot of bad information out there, and people are really vulnerable,” Crimmins said.
Crimmins and other experts noted that in the past, reverse mortgages typically were taken out by much older adults. Now increasingly, they are sought by younger borrowers who risk depleting all their home equity before they need it even more in their later years.
A new Consumer Financial Protection Bureau report on reverse mortgage advertising concludes that “the incompleteness of [the ads] raises heightened concerns because reverse mortgages are complex loans used by older, often financially vulnerable homeowners.”
The report, released June 4, says seniors reported in focus group sessions that they saw reverse mortgage TV ads frequently, even several times daily, and considered them informational. Yet some believed reverse mortgages would not need to be repaid at all, or didn’t know that compounding interest can swell the loan balance. The “tax free” claims made some think they would not have to pay property taxes. The ads often portray younger retirees enjoying active lives, obscuring the risks of taking the loans in the early years of eligibility.
In addition, some brokers have used the opportunity to push financial products the senior doesn’t need or steer borrowers toward overly large lump-sum withdrawals.
Need for financial education, risk protection
“The lenders have changed so much over the years. It’s a sales environment,” said Andora Monteiro, a housing counselor at Nuestra Comunidad in Roxbury. “To put it nicely, it’s an ‘upselling’ environment. When you get a senior who’s only ever known savings accounts, the lenders are sometimes taking advantage.”
Attorney Odette Williamson of the National Consumer Law Center noted that the new HUD rules will curb the main risks going forward, but non-borrowing spouses of elders who took reverse mortgages prior to August 2014 might remain unaware that the loan will come due when the spouse who signed the papers dies.
“The most important thing for people to realize is it’s not free money. It’s not government money. It’s a loan that needs to be repaid,” said Williamson.
Massachusetts requires face-to-face counseling by a certified adviser before a reverse mortgage is granted. But this mandate has faced vigorous resistance from the lending industry, and advocates are keeping a watchful eye to ensure the requirement survives.
In counseling sessions, seniors and their families can be educated on alternatives to tapping home equity as well as on reverse mortgage facts, figures and cautions.
Monteiro said it’s important for elders’ families to be involved and pay attention. The reverse mortgage comes due when the elder dies, and heirs may need to take out their own mortgage to pay it off if they don’t want to sell the house.
Nearly every advocate and counselor interviewed also mentioned a darker side, where family members are the ones abusing their elders’ trust.
“There are great families who want the best for parents. But we also see the predatory family members,” said Monteiro.
In some cases, there’s no scoundrel to blame. Costs simply get out of hand or an elder loses track of bills. Beyond keeping up with taxes and taking precautions to avoid scams, experts advise that a prompt cry for help can make a difference.
“As a group, elders come forward late in the game,” noted Len Raymond of HOME. “They’re proud, they’re independent. They come forward when it’s the last minute. In any single month we get calls from elders who haven’t talked with anyone, but are at the point where their houses are being auctioned off. If they’d come to us six months earlier, maybe we could have helped.”
Sandra Larson wrote this article through a Journalists in Aging Fellowship, a collaboration of New America Media and the Gerontological Society of America, with support from AARP. This story is part of a series on housing challenges for low-income seniors in Boston.