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Reverse Mortgages: Report to Congress

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Reverse Mortgages: Report to Congress JUNE 28, 2012 Reverse Mortgages Report to Congress Table of Contents EXECUTIVE SUMMARY ..................................................................................... 5 E.1 Key Findings ........................................................................................ 7 E.2 The CFPB’s Role ............................................................................... 10 E.3 About this Report ............................................................................. 12 1 . INTRODUCTION ......................................................................................... 13 2 . PRODUCT .................................................................................................... 16 2.1 Reverse Mortgage Product Development ..................................... 17 2.2 The HECM Program .......................................................................... 18 2.3 HECM Program Requirements & Consumer Protections ............ 20 2.4 Key Product Decisions for the Prospective Borrower .................. 23 2.5 Special-purpose HECM loans .......................................................... 31 2.6 Costs and Fees .................................................................................. 33 2.7 Alternatives to Reverse Mortgages ................................................. 35 3 . CONSUMERS .............................................................................................. 41 3.1 Consumer Awareness, Attitudes, & Motivations ........................... 42 3.2 Borrower Demographics ................................................................. 48 3.3 Borrower Behavior Differs by Segment ......................................... 57 3.4 Shifts in Borrower Usage Patterns ................................................... 61 3.5 New Risks to Consumers .................................................................. 67 2 REPORT TO CONGRESS ON REVERSE MORTGAGES, JUNE 2012 4 . MARKET ....................................................................................................... 70 4.1 Size of the Market .............................................................................. 71 4.2 A Complex Market ............................................................................ 73 4.3 The HECM Market Today ................................................................. 76 4.4 The Evolution of the HECM Secondary Market ............................. 82 4.5 Continued Dominance of the Fixed-Rate, Lump-Sum Product and New Approaches to Pricing ................................................................... 90 5 . REGULATORY STRUCTURE ..................................................................... 100 5.1 Federal Consumer Protection Regulation ................................... 101 5.2 FHA Regulation of Reverse Mortgages Through the HECM Program .................................................................................................. 105 5.3 State-level Regulation & Oversight ............................................... 106 5.4 Prudential Regulator Guidance ..................................................... 108 5.5 Federal Reserve Board’s Proposal ................................................ 108 6 . CONSUMER PROTECTION CONCERNS ............................................... 110 6.1 Reverse Mortgages are Complex Products that are Difficult for Consumers to Understand ................................................................... 111 6.2 Advertising ....................................................................................... 113 6.3 Cross-selling .................................................................................... 118 6.4 Counseling ....................................................................................... 122 6.5 Costs & Fees .................................................................................... 127 6.6 Tax and Insurance Defaults ............................................................ 129 6.7 Non-Borrower Protections ............................................................. 133 6.8 Fraud ................................................................................................. 136 6.9 Emerging Concerns ........................................................................ 141 7 . CONCLUSION ........................................................................................... 146 7.1 Key Findings .................................................................................... 148 7.2 The CFPB’s Role .............................................................................. 150 7.3 Areas for Further Research ............................................................ 152 APPENDIX I: THE PROPRIETARY MARKET ................................................. 153 A.1 Proprietary Reverse Mortgage Products .................................... 153 A.2 Product Features ........................................................................... 155 A.3 Product Risks .................................................................................. 156 3 REPORT TO CONGRESS ON REVERSE MORTGAGES, JUNE 2012 A.4 Secondary Market .......................................................................... 157 APPENDIX II: DISCLOSURE FORMS ............................................................ 158 APPENDIX III: METHODOLOGY .................................................................. 175 APPENDIX IV: REVERSE MORTGAGE CONSUMER GUIDE ..................... 177 NOTES ............................................................................................................. 182 4 REPORT TO CONGRESS ON REVERSE MORTGAGES, JUNE 2012 Executive Summary A reverse mortgage is a special type of home loan for older homeowners that requires no monthly mortgage payments. Borrowers are still responsible for property taxes and homeowner’s insurance. Reverse mortgages allow seniors to access the equity they have built up in their homes now, and defer payment of the loan until they die, sell, or move out of the home. Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. The rising loan balance can eventually grow to exceed the value of the home, particularly in times of declining home values or if the borrower continues to live in the home for many years. However, the borrower (or the borrower’s estate) is generally not required to repay any additional loan balance in excess of the value of the home. For most Americans, their home is the single largest asset they own. In 2009, half of homeowners age 62 and older had at least 55 percent of their net worth tied up in home equity.1 Home equity is accumulated over a lifetime of mortgage payments and house-price appreciation, but generally cannot be accessed without selling the home or taking out a loan. Reverse mortgages enable older homeowners to use that home equity to enjoy a more comfortable retirement without selling their home. Reverse mortgages are not the only option for accessing home equity without selling the home, however. Traditional home equity loans and home equity lines of credit (HELOCs) are possibilities. Reverse mortgages offer a different set of benefits, costs, and risks to the borrower than home equity loans or HELOCs. Reverse mortgages generally are easier to qualify for than home equity loans or HELOCs, which require adequate income and credit scores. Reverse mortgages do not require monthly mortgage payments and offer several important financial protections, but they have higher costs. Home equity loans and HELOCs have required monthly payments and offer fewer financial protections for the borrower, but they have lower costs. Today, the market for reverse mortgages is very small. Only about 2 percent to 3 percent of eligible homeowners currently have a reverse mortgage, and only about 70,000 new reverse mortgages are originated each year.2 But reverse mortgages have the potential to become a much more prominent part of the financial landscape in the coming decades. In 2008, the first baby boomers became eligible for reverse 5 REPORT TO CONGRESS ON REVERSE MORTGAGES, JUNE 2012 mortgages. The baby boom generation (48- to 66-year-olds in 2012) includes more than 43 million households, of which about 32 million are homeowners.3 As of 2009, the median home equity for baby boomer households was $108,000.4 Nearly all reverse mortgages today are insured by the Federal Housing Administration (FHA)a through its Home Equity Conversion Mortgage (HECM) program. The insurance guarantees that borrowers will be able to access their authorized loan funds in the future, subject to the terms of the loan, even if the loan balance exceeds the value of the home or if the lender experiences financial difficulty. Lenders are guaranteed that they will be repaid in full when the home is sold, regardless of the loan balance or home value at repayment. Borrowers or their estates are not liable for loan balances that exceed the value of the home at repayment – FHA insurance covers this risk. The original purpose envisioned for reverse mortgages was to convert home equity into cash that borrowers could use to help meet expenses in retirement. Borrowers could choose between an income stream for everyday expenses, a line of credit for major expenses (such as home repairs and medical expenses), or a combination of the two. It was anticipated that most, though not all, borrowers would use their loans to age in place, living in their current homes for the rest of their lives
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