My good friend Fred Wilkins, sent me a New York Times article last week and suggested I write a column on the subject of reverse mortgages. The Times published an article a couple of weeks ago on the effects that reverse mortgages have on the elderly. Many elderly people are losing their homes because they cannot afford the fees associated with reverse mortgages, not to mention the taxes and maintenance that accompany home ownership.
The Times reported that some lenders are encouraging seniors to take out reverse mortgages for “free money” and to finance extravagant expenses such as cruises and other expensive vacations.
There are 775,000 outstanding reverse mortgages and the rate of default on these mortgages is over 9 percent. These mortgages are essentially unregulated, but the newly created Bureau of Consumer Financial Protection is developing regulations that will provide uniform nationwide regulations for these financing tools. The Bureau of Consumer Financial Protection was part of the Dodd-Frank financial reform legislation backed by President Obama and passed by Congress in 2010 after the financial collapse in 2008. The Bureau has become the focus of bitter fighting between the Obama administration and Republicans and banking lobbyists.
In May 2011, 44 Republican senators sent a letter to the President stating that they would refuse to vote for any nominee to lead the bureau, demanding instead a board of directors rather than a single leader. President Obama appointed a director during a Congressional recess, which has caused controversy. Thus, the Bureau has been delayed in beginning its work.
In the meantime, the reverse mortgage industry remains largely unregulated. According to the New York Times article, Peter Bell, the president of the National Reverse Mortgage Lenders Association has apparently met with officials from the federal Department of Housing and Urban Development to begin hashing out a way for lenders to adopt a uniform standard to determine whether seniors can afford to take on the loans. Yet, I suspect Mr. Bell is a vehement opponent of any meaningful regulation.
Missouri has adopted a law called the Reverse Mortgage Act that does impose some requirements on lenders. Among those regulations:
Prepayment penalties are prohibited.
Interest rates can be fixed rates or adjustable and can provide for interest that is contingent on appreciation in the value of the house.
If periodic advances are provided for in the mortgage, the lender cannot reduce those payments in amount or number by any adjustment in the interest rate.
There are penalties if the lender does not make payments.
Repayment is subject to certain conditions, including prohibition of making the mortgage due and payable if there is a temporary absence from the home less than 60 days.
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Temporary absences from the home between 60 days and six months do not trigger repayment if the home owner secures the home.
The lender must prominently disclose any interest or other fees that are due and payable when the mortgage becomes due and repayment in full is made.
Origination fees are limited to 2 percent of the loan amount.
Certain limits are also imposed on fees that are charged.
Used correctly, reverse mortgages can be valuable tools as seniors can stay in their homes and gain access to money needed for retirement. If an elderly person has built up equity in his or her home and can borrow a percentage of that as a line of credit or in a lump sum, the loan does not have to be paid until the borrower dies or moves out. Yet, the homeowner still has to pay property taxes, maintenance and insurance.
Some abuses have occurred. Some seniors have indicated that lenders have suggested that the older person in a couple be the sole borrower, leading to a situation in which the loan balance is due if the older member dies first. Apparently, some lenders have promised couples that the younger spouse can be added later, but that has not occurred in every situation. Some lenders have engaged in false and misleading advertising.
Although Missouri law does attempt to regulate reverse mortgages, it is obvious that the Missouri law is slanted strongly in favor of the lenders.
Hopefully, national regulation of these mortgages won’t be derailed by national politics. We saw in 2008 what happens when the financial industry goes unregulated. Let’s not let the foxes guard the chicken house again.
Bob Buckley is an attorney in Independence. You can reach him at email@example.com.