The most common complaints about reverse mortgages.

The most common complaints about reverse mortgages

Reverse mortgages are complex financial products with many rules and moving parts. As such, they are the source of many complaints from those who were either misinformed or misunderstood the provisions of the contract.

In a report titled “Snapshot of Reverse Mortgage Complaints,” the Consumer Financial Protection Bureau (CFPB) revealed the most common complaints by reverse mortgage borrowers between December 2011 and December 2014.

According to the report, most complaints fell in one of two categories. First, many consumer complaints about reverse mortgages “indicate confusion and frustration over the terms and requirements of reverse mortgages.” Second, many borrowers have problems with loan servicing.

These were the most common complaints listed in the report:

Consumers are unable to refinance

Many homeowners have expressed frustration over the inability to refinance their existing reverse mortgage. The reason this becomes difficult is that the original reverse mortgage has stripped a large chunk of the home’s equity, leaving insufficient equity to fund a second reverse mortgage. After all, when refinancing a reverse mortgage, proceeds from the second loan have to repay the loan balance on the first loan.

This most likely happens if the borrower took out a large lump sum from the reverse mortgage principal limit. This will be exacerbated if the home itself hasn’t appreciated in value much since obtaining the original reverse mortgage.

On the other hand, if the borrower established a line of credit and had not accessed much of that credit line, or opted for monthly payments, then there is likely sufficient equity in the home to fund a reverse mortgage refinance.

Consumers are unable to change terms of the loan

Many homeowners contend that the variable interest rate is too high and want the ability to change it. Others believed they would be able to add borrowers to the loan after it closed or assign it to a family member. None of these changes have ever been allowed on federally insured reverse mortgages, indicating misunderstanding, miscommunication or misrepresentation during the application and closing process.

Non-borrowing, surviving spouses, worry about losing their home

Until recently, it was possible for widows or widowers to lose their homes after their spouses died if the dying spouse was the only party listed on a reverse mortgage. This would occur if one spouse were under age 62 at the time of application, or if the couple intentionally left the younger spouse off the loan to increase the amount they could borrow. Unless the surviving spouse had enough money to repay the loan, he or she would be forced to move out and sell the home, per the conditions of the contract.

A change in the law two years ago provided increased protection to spouses who are not named on a reverse mortgage contract. Today, spouses who are not listed on the reverse mortgage can remain in their homes after the death of the borrower by being designated Eligible Non-Borrowing Spouses.

Non-borrowing spouses can stay in their homes following the passing of the borrower on a reverse mortgage under certain conditions. However, they will not have access to any remaining loan funds after the borrowing spouse has died.

Consumers have trouble repaying the loan

Once the lender learns of a borrower’s death, it will send a notification to relatives or the executor of his or her estate that the loan is due.

The lender will have the property appraised. If it is worth less than the loan balance because it declined in value, then the amount due is equivalent to 95 percent of the assessed value; heirs will not have to pay the full loan balance. The FHA insurance will cover the difference.

Complaints have arisen due to the length of time it takes for lenders to appraise the home, so that the loan can be funded.

Discuss the loan-closing process with the lender when you apply for the reverse mortgage so that you understand the steps involved. Also, make sure your heirs are aware of the process in the event they have to sell the home to repay the HECM loan after your death.

Consumers are facing foreclosure for failing to pay taxes and insurance

A reverse mortgage places a lien on the property. During this time, the homeowner maintains title and property ownership, and thus responsibility for maintenance, taxes, insurance, utilities, and other expenses.

Borrowers who fail to pay property taxes and insurance on their homes will default on their loan, and the lender may call the loan and make it payable immediately. This means the borrower may have to sell the property to repay the debt.

Before 2015, there were no credit or income requirements for obtaining a reverse mortgage. Eligible homeowners had to be at least age 62, they had to own their homes with little to no mortgage balance left, and the home had to be their primary residence. Also, the property had to meet FHA standards.

All of these requirements remain, but since 2015 borrowers also have to undergo income and credit assessments before obtaining a reverse mortgage.

The reason for the change is a recent surge in the number of reverse mortgage defaults caused by borrowers failing to keep up with taxes and insurance. The Federal Housing Administration (FHA) imposed the new income and credit requirements on reverse mortgage applicants to reduce the chances of borrowers defaulting on their loans by measuring their capacity to pay property taxes and homeowners insurance.

To minimize having the same complaints, applicants for reverse mortgages should research the terms and conditions of these types of loans, ask questions of prospective lenders and know about recent changes in lending laws and guidelines.