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CFPB Issues Warning on Using Reverse Mortgages to Delay Social Security

The Consumer Financial Protection Bureau issued a report Thursday with an accompanying warning stating that taking out a reverse mortgage can be an “expensive way to maximize Social Security benefits.” The Bureau also released a video and guide explaining reverse mortgages to consumers.

Issued by the agency’s Office of Older Americans, the report explores the strategy of delaying Social Security benefits through the use of a reverse mortgage, finding that the strategy carries financial risks, namely that the reverse mortgage loan costs will exceed the additional amount of lifetime Social Security benefits realized by the borrower.

“As nearly five million homeowners will turn age 62 by 2020, the Consumer Financial Protection Bureau (CFPB) is concerned that the broad promotion of this strategy could result in an increased number of homeowners borrowing a reverse mortgage for this purpose,” the report states.

The report details the strategy in which a reverse mortgage is used to delay Social Security and shows home equity levels and costs over time under hypothetical scenarios. The Bureau finds this strategy can jeopardize retirement security by tapping into home equity prematurely and potentially reducing options for homeowners such as purchasing a smaller home later in time. The report also notes the reduced potential for borrowers to handle financial shock under the Social Security delay strategy.

“A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully,” said CFPB Director Richard Cordray in a press release. “For consumers whose main asset is their home, taking out a reverse mortgage to delay Social Security claiming may risk their financial security because the cost of the loan will likely be more than the benefit they gain.”

The CFPB finds that by age 69, those who employ the strategy starting at age 62 will pay 60% in costs for the loan for the amount borrowed, amounting to an expense that is $2,300 more, on average, than the benefits of delaying Social Security.

With the warning, the CFPB also released a video and guide explaining reverse mortgages to consumers, including a detailed question-and-answer section addressing costs, fees, non-borrowing spouse issues, loan obligations, and other elements of the loan.

Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association, objected to the CFPB’s findings in a statement to RMD.

“Taking a reverse mortgage, or any financial product, is a much more complex decision than the CFPB’s narrow account of one Social Security claiming strategy makes it out to be,” Bell said. “We will continue to support research and analysis of the value of using home equity to bridge the income gap created when Social Security claiming is delayed until Full Retirement Age or age 70.”

“We always encourage consumers to consider any financial decision as part of their comprehensive retirement financial plan, and to seek guidance from qualified individuals who are familiar with their personal situation,” Bell said.

View the CFPB’s report, video and guide via the CFPB’s website.

Written by Elizabeth Ecker