AARP: Lenders abuse reverse mortgage sales

Firms then push LTC, annuities to borrowers

By Charles Paikert

January 14, 2008

Reverse-mortgage lenders may be depleting the home equity of borrowers by offering inappropriate financial products, according to a report issued last month by AARP.

Nine percent of borrowers surveyed by the association said lenders had offered them financial products such as annuities and long-term-care insurance which, according to the study, "may be unwise investments given the costs and purposes of the loan."

"Consumers should be wary of anyone who tries to sell them something to be paid for with a reverse mortgage," said Donald Redfoot, strategic-policy adviser for Washington-based AARP's Public Policy Institute, and the principal author of the report, which was presented to a hearing of the Senate Aging Committee last month.

He went on to quote from a warning from the organization to consumers at aarp.org/revmort: "If anyone is trying to sell you something and recommending you use a reverse mortgage to pay for it, that's generally a good sign that you don't need it and shouldn't be buying it."

Homeowners using a reverse mortgage borrow against the equity of their house and receive payments from a bank. The loan is repaid with interest when the borrower sells the house, moves out permanently or dies.

The AARP report also found that nearly half the borrowers were using reverse mortgages to pay for "necessities" such as debt reduction and health-care costs. By comparison, 38% of borrowers said they planned to use reverse-mortgage payments for "extras."

Similarly, a Wall Street Journal story last month reported that reverse mortgages increasingly were being used by homeowners as a way to generate cash to pay off high interest rates on homes that had been refinanced with subprime mortgages.

However, AARP noted that while consumers were initially favorable and increasingly aware of the reverse mortgage, the product's high cost as much as 7% of a home's value deterred 63% of survey respondents from deciding to apply for one. In addition, more than two-thirds of survey respondents who held a reverse mortgage said the cost was high.

In fact, the report found that the percentage of homeowners who said they were willing to consider using the product dropped from 19% in 1999 to 14% last year. According to the report, only 1% of homeowners over the age of 62 used a reverse mortgage.

Financial planners also said they were wary of reverse mortgages.

The product appeals to older baby boomers afraid of outliving their assets, said Vicki Schultz, a certified financial planner and executive vice president of Reno, Nev.-based Schultz Financial Group Inc. However, she said that she would recommend reverse mortgages only as a "last resort," citing high upfront fees and the possibility that borrowers may "get less out of their home than they expect."

While calling fees for reverse mortgages "outrageous," Saundra Davis, a certified financial planner with San Francisco-based Sage Financial Solutions Inc., said the product may have to be considered by clients who absolutely need the money for a costly expense such as long-term care.

"The catch," she said, "is to find a good loan by talking to someone who is neutral and doesn't sell the product."

Ms. Davis said she recommends her clients to a specialist who "truly understands what a reverse mortgage is."

"People tend to treat the loan like it's an endless supply of money that they don't have to pay back, and that's wrong," she warned.

John Rother: Lenders engaged in abusive sales practices are a concern.

AARP's Mr. Redfoot urged planners to check the association's website for information and a list of questions that may be helpful for homeowners considering reverse mortgages, including the affordability of the loans and less costly options.

In recent testimony before the Senate Aging Committee, John Rother, AARP's director of policy and strategy, suggested several policy changes to make reverse mortgages more mainstream. Chief among these was reducing the cost of the Home Equity Conversion Mortgage insurance program by removing the cap on the number of reverse mortgages that the Federal Housing Administration can insure.

"High costs and abusive marketing practices must be addressed," Mr. Rother told the Committee.

International Communications Research, a Media, Pa.-based unit of AUS Inc. of Mount Laurel, N.J., conducted the research for AARP in December, surveying more than 1,500 people 62 or over who received counseling about using reverse mortgages. It also interviewed more than 1,000 people 45 and older to gauge awareness and opinions about the product.

Charles Paikert can be reached at cpaikert@crain.com.