Not considering a reverse mortgage could lead to big problems for many retirees as they look to ways to supplement their income in light of dwindling, says a SmartMoney column by Alicia Munnell, who heads up the Center for Retirement Research at Boston College.
Focusing in on a recent Consumer Financial Protection Bureau study of the reverse mortgage market, Munnell writes that the major concerns of the CFPB—product complexity, misleading advertising and lack of family or spousal involvement, and a trend toward younger borrowers and more fixed rate loans—are legitimate, but manageable.
…Americans are going to need reverse mortgages. Most households are going to find that their retirement incomes fall short of their retirement needs and will experience a decline in living standards. Being able to tap their home equity — often their single largest asset — provides a source of income that could supplement Social Security and the income generated by their meager 401(k) balances. To date, however, the reverse mortgage market is small; only about 2% to 3% of those eligible take out such a loan.
The CFPB identified three major concerns:
1. The products are complex, and the existing tools and counseling do not enable consumers to make good decisions.
2. Misleading advertising, spouses’ lack of knowledge about the transaction, and the failure to pay insurance and taxes creates risks for consumers.
3. Recent trends toward taking out loans at younger ages and withdrawing more of the money upfront (often to pay off their traditional mortgage) put consumers at risk.
These concerns are legitimate, but manageable. The products are more complex than traditional mortgages and not suitable for everyone. Careful counseling is essential so that providers sell these products to appropriate people. Misleading advertising should be identified and stopped; spouses, even if not co-borrowers, should be provided with information and required to sign off on the transaction; and lenders should make sure that borrowers have enough to cover taxes and insurance by either lending only to those with some financial cushion or withholding enough to cover these payments. Taking reverse mortgages at younger ages, the final concern, may be a sensible strategy if used to pay off traditional mortgages, but not to gamble in the stock market. In either case, the lender should make sure the consumer has the required financial cushion before taking out a reverse mortgage.
The bottom line is that the reverse mortgage market should be fixed to the extent that it’s broken, but dismissing the product will doom many households to poverty in old age.
Written by Elizabeth Ecker