Cecily O'Connor
RedwoodAge.com

Reverse mortgages offer older homeowners a way to generate extra cash, but high costs and the potential for abusive sales practices often outweigh the advantages. 

Attention surrounding reverse mortgages, which allow homeowners over 62 to borrow against their home equity, has been heightened amid warnings that some lenders sell inappropriate financial products to reverse mortgage customers flush with cash from a loan.

An AARP report released Wednesday at a Senate Aging Committee hearing estimated that 9 percent of borrowers said their lenders also offered them specific financial products – including annuities and long-term care insurance.

“Reverse mortgages provide a promising way to convert home equity savings into cash,” said John Rother, AARP’s director of policy and strategy. “But recent growth in the programs masks the fact that only 1 percent of older homeowners currently are using them. High costs and abusive marketing practices must be addressed."

'Out to Make a Buck'
Sen. Claire McCaskill, who chaired the committee hearing, plans to introduce legislation to address concerns about aggressive marketing and excessive fees. 

Increased protections are needed as the flood of baby boomers start to retire. Next year, some of the oldest baby boomers, now 61, will be eligible to enter into a reverse mortgage contract. At the same time, many boomers' elderly parents may already be generating extra cash through a reverse mortgage, attracted by the potential to pay for necessities such as health care.

"Seniors who have worked their entire lives to be able to enjoy retirement should not be victimized by people out to make a buck,” said McCaskill. “We need to have adequate protections in place to ensure only those who would benefit from a reverse mortgage qualify.  Without this, reverse mortgages could hurt as many seniors as they help.”

In addition to AARP, the hearing included testimony from the HUD officials, professionals in the reverse mortgage industry and family members of those who've been hurt by reverse mortgages. 

Several lawsuits already have been filed against Financial Freedom, a reverse mortgage lender.

One case alleges that Ernestine Boach was advised to take out a reverse mortgage from Financial Freedom for $171,000 on the home she owned and then to use the proceeds to purchase insurance products, according to Ronald Marron, the plaintiff's attorney. Those products included a deferred annuity for $80,000 and a $44,350 immediate annuity to fund payments on a $250,000 flexible premium life insurance policy. The company denies the claims.

"Financial Freedom's policy is to not discuss publicly the details of any pending litigation except to say that we believe the claims made by Mr. Marron on behalf of Ms. Boach are baseless and without merit, and we plan to continue to vigorously defend ourselves," the Irvine, Calif.-based company said in a statement.

Shift into Reverse
The market for federally insured reverse mortgage loans was created 20 years ago through the Home Equity Conversion Mortgage (HECM) insurance program. The market saw 107,000 loans originate in 2007, up from 6,600 loans in 2000.

In general, reverse mortgage borrowers are initially favorable about the loans. Ninety-three percent of borrowers said their reverse mortgages had a positive effect on their lives, and 63 percent said they would be “very likely” to recommend a reverse mortgage to a friend, according to the AARP study.

However, high costs associated with reverse mortgages remain a serious concern. Expense was the most frequently identified deterrent for shoppers who ultimately decided against applying for the loan. More than two-thirds of the actual borrowers surveyed said that costs were high.

  At the hearing, AARP recommended a series of remedies to increase consumer protections, such as:

• Reducing costs and building consumer confidence in the HECM Program. For example, removing the limit on the number of reverse mortgages that the Federal Housing Administration can insure would promote higher volume and more competitive pricing;

• Encouraging product innovations to meet the growing diversity of consumer needs. Under the federally-insured program, many prospective borrowers would prefer smaller credit lines (with lower costs) than they can receive now, but do not currently have that option;

• Increasing funding for consumer counseling and information; and

• Improving marketing practices of lenders through education and accreditation programs that promote the ethical marketing of reverse mortgages.