Consumer Reports: Don’t Get Suckered into Reverse Mortgages

Some reverse mortgage advertisements may make the financial tool seem as though it is a “risk-free” way to fill financial gaps in retirement, but seniors should not be “suckered” into buying a reverse mortgage, advises Consumer Reports in a recent article.

“The ads don’t always tell the whole story,” says nonprofit Consumer Reports, adding that reverse mortgages can put retirement at risk.

The article cites the Consumer Financial Protection Bureau (CFPB) study that said many reverse mortgage ads today are either incomplete in their messaging or contained inaccurate information.

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Consumer Reports acknowledges that the reverse mortgage market will likely grow as Baby Boomers retire and seek additional revenue streams.

“Nearly half of retired Baby Boomers will lack sufficient income to cover basic expenses and uninsured health care costs,” the article says. “This makes them all the more vulnerable to sales pitches for reverse mortgages from trusted celebrities such as Robert Wagner, Pat Boone, Alex Trebek, former Senator Fred Thompson and Henry Winkler, who played the lovable cut-up “Fonzie” on Happy Days.”

In the article, Consumer Reports also offers facts about reverse mortgages to avoid being misled by advertisements, including that borrowers still must “pay property taxes, insurance, utilities, fuel, maintenance, and other expenses.”

Read the article here.

Written by Cassandra Dowell

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  • Just because an article appears in CR does not make its contents correct or valid. Yes, Ms. Fredman seems confident in the subject matter but appearances are quite deceiving. Here are a few examples.

    Ms. Fredman claims: “And the interest is not tax-deductible until the loan is paid off.” That statement is not only false but also very misleading. The IRS itself provides information about the interest deduction on reverse mortgages on Page 5 of its 2014 IRS Publication 936 which states the following: “Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II.” The title of this publication is: “Home Mortgage Interest Deduction” and can be found at http://www.irs.gov/pub/irs-pdf/p936.pdf

    If readers rely on what Ms. Fredman writes, they could pay off much of the accrued interest in years before the loan is paid off and potentially lose most of the income tax benefits of the interest deduction by deducting it all in the year the reverse mortgage is paid off as Ms. Fredman ADVISES. What readers might not realize is that if the interest is deducted in the wrong tax year(s), any income tax benefit could be lost in IRS audit unless the correct tax year(s) is still statutorily open for refunds and the deduction results in the lowering of a tax liability. Further there are limits on the amount of home mortgage interest that can be deducted. Ms. Fredman could have provided the quotation above with a little research but providing correct information does not appear to have been her primary objective.

    Further Ms. Fredman confuses consumers by implying that reverse mortgages provide income in saying: ” …while a reverse mortgage may increase your monthly income….” If the money received from a reverse mortgage is subject to repayment, how is that income? The cash received is loan proceeds and it is cash inflow BUT it is not income and cannot increase monthly income. The whole idea of a reverse mortgage to give cash to borrowers when they need it but at the same time when it is paid out to the borrower, it also increases the balance due on a legitimate debt, a nonrecourse mortgage. Income does not do that. Ms. Fredman would have been OK in saying that reverse mortgages can increase monthly cash inflow but instead she calls it income. Why? Again providing correct information about reverse mortgages does not appear to have been her primary objective.

    Here is another mistake: “Doing that might mean selling the home to have enough money to pay the accrued interest.” But she seems to forget that the balance due includes not only accrued interest but also principal and in the case of a FHA reverse mortgage it also includes accrued insurance premiums and in earlier loans accrued servicing fees. Most importantly Ms. Fredman never states that reverse mortgages that are currently being originated or were originated in the last few decades are nonrecourse mortgages meaning lenders cannot obtain judgement deficiencies against borrowers or their heirs through the courts if the value of the collateral submitted as payment on the reverse mortgage is less than the balance due.

    Valid accusations require work in gathering validatable evidence and facts; they should be at a minimum complete. Several points that Ms. Fredman made were incomplete, false, or misleading.

    Have seniors been suckered into getting reverse mortgages as the title implies? I am sure the answer to that is yes but the likelihood of that happening is very low especially when it comes to government insured reverse mortgages with their independent counseling requirements and substantial disclosures. At the same time seniors should be diligent to do their own research on reverse mortgages as well as seeking the help of trusted advisers and family. No system of selling products is without flaws but FHA has put forth a strong effort to mitigate the number of misinformed decisions when it comes to obtaining government insured reverse mortgages.

    (The opinions expressed in this comment are not necessarily those of RMS or its affiliates.)

  • I recall a similar article from Consumer Reports appearing in their publication approximately in 2006 while at Financial Freedom. I also subscribe to their monthly publication and noticed their own advertising for seniors to donate their homes to them and they would send you a monthly check based on your age (annuity payment). So, they think it was advisable to sign title over to Consumers Union in exchange for a monthly payment but not advisable to consider a reverse mortgage. I actually contacted them to obtain information regarding their program which I still have. They were not interested in helping me because, at the time, I was too young at 62! They obviously wanted only the older seniors to do this in order for them to cash in sooner! I do not know if they still promote this but it still is an indication of their motives and passion for helping seniors.

    • Consumers Union is a far-left advocacy organization, and if one were only to get the magazine, it would be hard to discern that the heart of the group is socialist in nature. But scratch beneath the surface, and you easily see the bias against anything free-market or private-sector. Of course, as you discovered, such distaste and sanctimony do not apply when the money goes in the Union’s pocket!

    • David,

      Consumers Union is qualified with the IRS as a 501(c)(3) organization and also qualified to receive tax deductible charitable contributions as described in Internal Revenue Code Section 170. As such it has the right to seek charitable gifts from the public such as the gift of a personal residence into a charitable remainder annuity trust (a CRAT). Personal residential CRATs usually make more financial sense to the donor when the donor is older. Declining you at 62 was a very responsible thing to do.

      So it is not clear what your concern is. Like most of us who do not esteem Consumers Union in that manner, the answer is easy; simply ignore their solicitation.

      However, for many making a donation in this manner to charities they believe in makes a lot more sense than giving up equity in the form of interest to a HECM lender. That is certainly a very legitimate alternative and many of us believe the better alternative in those circumstances.

  • The CR and the CFPB, they really get my Goat! I like the one that the CFPB said about ads that companies put out, “Incomplete in their messaging or contained inaccurate information”.

    Do the members of the CFPB ever watch TV or read Magazines as well as news papers? How many ads go into so much detail with their advertisements, they don’t! Companies, banks, mortgage bankers, car dealerships and you name it have a certain amount of time and money to put in an ad to get their message out. Advertising is meant to give the public enough information to make them interested enough to check it out further.

    I don’t see the CR and CFPB talk about the detailed material the AAG’s of the industry send out to the seniors. The material many of these companies send out to our seniors that inquire about reverse mortgages because of seeing an ad is so detailed and costly to the company. Our industry supplies those that inquire on an ad they see is more detailed than most companies advertising today.

    Why don’t we see or hear this being published by the CR, the CFPB and the news media, why????
    It is sad to see a committee spun out of a bill passed by congress like the CFPB get away with the tactics they use because they have to justify their existence!!!!!!
    John A. Smaldone

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