THE CONSUMER FINANCE PROTECTION BUREAU released a report last week summarizing the most common complaints it has received about reverse mortgages since the agency began receiving complaints in 2011. The report reveals that despite industry efforts to educate borrowers and the requirement that all borrowers receive independent counseling prior to applying for a reverse mortgage, consumers in many cases are still confused about the terms of a reverse mortgage.

One of the most common complaints came from consumers who had been denied changes to their reverse mortgage. Many seemed unaware that their equity would decrease as the principal amount owed increased over time. Borrowers with a reverse mortgage do not make monthly payments like a traditional mortgage. The interest charged monthly is added onto their principal balance, and as time goes by the equity in the property decreases because of the rising amount of the principal balance.

Many complaints came from consumers who wanted to refinance their reverse mortgage and could not because of insufficient equity in their property.

But the most frequent complaint about requested loan changes came from consumers who wanted to add borrowers to the loan in order to extend the term of the loan. Reverse mortgages are only paid back when the last remaining borrower permanently moves from the property.

Some homeowners have taken reverse mortgages and purposely left a spouse off the loan in order to qualify for more proceeds, or because one spouse was not old enough to qualify. This has been a particularly thorny issue for the industry, as this practice leaves the spouse who is not a borrower in a precarious situation if the borrower spouse dies. In most cases the remaining spouse then must sell the property or refinance into a new loan.

HUD took remedial action for this problem in August 2014, enacting new provisions and protections for the remaining spouse that allow them to remain in the property — and that don’t require them to pay off the reverse mortgage until they permanently move from the property. The problem is that this new provision only protects the spouses of borrowers who originated reverse mortgages after the August effective date in 2014.

Many complaints were received from adult children of reverse mortgage borrowers who often were not aware that a reverse mortgage is not assumable, meaning it can be transferred from the current owner to a buyer. In my personal experience, to avoid this misunderstanding most reverse mortgage professionals encourage participation by the adult children of borrowers in the application process. In some cases, though, borrowers do not want their children to know they are getting a reverse mortgage. This can lead to all kinds of problems and confusion when the borrower dies and the adult children learn that there is a reverse mortgage on the property. I am not sure how the industry can solve this problem when it comes down to a matter of privacy for the borrower.

The reverse mortgage industry has suffered mightily as a result of the Great Recession and the decline of home values. Declining values also created a situation where greater numbers of reverse mortgage borrowers were dying with loan balances greater than the values of their properties. Since most reverse mortgages are guaranteed by the federal government, this situation did not create liabilities for the estate but did create headaches for the folks trying to settle their estates. It is not surprising to me that the time frame for the CFPB’s latest report is 2011-14, as home values only started to recover in mid-2012.

I have always been a believer in this product for the right borrower, in the right circumstance and with a thorough and complete explanation of the complex terms of the loan. The industry has evolved and has made changes as experience with the product has dictated. At the heart of the industry are some really good people who honestly believe they are on a mission to help create a better life for seniors.

Guy Benjamin (CAL BRE License #01014834, NMLS 887909) writes a weekly column for The Herald, offering general information on real estate matters. As it is impossible to address all possibilities and variations, he will try to answer individual questions by readers who contact him at 707-246-0949 or guyb@fairwaymc.com.height=”150″ />

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