Reverse Mortgages, Simplified

The Office of the Comptroller of the Currency (OCC) issued a consumer advisory warning consumers 62 years of age or older of the drawbacks and dangers associated with taking out a reverse mortgage — and outlining the benefits of these “complex loans.” The bulletin comes at a time when getting back to “plain vanilla” financial products continues to be a huge topic of discussion, especially among lawmakers conducting hearings over financial regulatory reform. The House Financial Services Committee this week is hearing testimony regarding the Administration’s proposed reforms, including a consumer financial protection agency that may regulate the types of loans banks can sell to consumers. Committee chairman Barney Frank (D-Mass.) has opposed the “plain vanilla” requirement that lenders would be allowed to market and sell only simple loans. The “plain vanilla” language was mirrored in comments by American Securitization Forum deputy executive director Tom Deutsch to Forbes, when he compared the mortgage-backed securities (MBS) of the future to vanilla ice cream as opposed to past ‘Baskin-Robbins flavors.’ If reverse mortgages — or home equity conversion mortgages (HECMs) under the Federal Housing Administration‘s lending program — were a flavor of ice cream, they might be chocolate. They certainly would be appealing to qualifying homeowners looking for additional income to supplement their retirement plans or meet health care costs. Reverse mortgages typically bear low interest rates and do not require monthly payments. In fact, they are not due until the borrower ceases using the home — either sells it, moves out or passes away. But just like that single-scoop of fudge-ripple, double-churned dark chocolate ice cream is likely to go straight to your thighs, reverse mortgages pose some drawbacks. The OCC points out mortgage insurance premiums and other up-front costs tend to make reverse mortgages more expensive over the long-term, and payments received are added to the loan balance over time, which also increases due to interest charged. Plus, borrowers that neglect to pay property taxes, insurance and reasonable home repairs may find their loans become payable prematurely. Reverse mortgages are typically repaid by surrendering the collateral — the home itself. That works best when the borrower has passed away or moved into a retirement or assisted living facility. But a reverse mortgage that becomes due when the borrower is not yet ready is a huge risk. If the borrower (or the borrower’s family in the case of the borrower passing away) wishes to keep the home, the mortgage must be repaid in full, plus all accumulated interest and fees. So when the sugar high of a reverse mortgage wears off and the reality of the expense crashes down, borrowers might wish for a more “plain vanilla” loan. The OCC suggests in its bulletin that consumers consider other options — like standard mortgages and home equity lines of credit — that might not pose as large a risk.