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AARP Bulletin

Are Reverse Mortgages Helpful or Hazardous?

Marketed to older adults, the loans both provide and deplete needed income

HUD gets tough

Some groups are challenging the legality of evicting surviving spouses if the house isn't paid for, outright, one year after the borrower has died. AARP Foundation and the Washington law firm of Mehri & Skalet have filed suit against HUD, which regulates these loans. The 2011 suit accuses the agency of failing to recognize that the law does indeed protect surviving spouses not listed on these mortgages.

Since then, "dozens of people" in similar situations have called, says Jean Constantine-Davis, a senior lawyer with AARP Foundation.

The matter is pending but HUD hasn't let up. The agency recently instituted guidelines that could result in another wave of troubled borrowers. HUD has directed lenders and loan servicers to get tough with borrowers who haven't kept up with their annual real estate taxes and property insurance. HUD says these borrowers should not be permitted to remain in default indefinitely.

What's next

Shoring up the reverse mortgage program is no easy task. As the federal government faces a steep deficit, and as more borrowers find themselves in trouble with these loans, HUD is implementing reforms — and one in particular may make reverse mortgages less appealing. Borrowers in most cases will no longer be allowed to take lump sums upfront that equal the home's entire equity. Instead, they'll be required to set aside a portion of those proceeds for future use, such as covering property taxes and insurance for years to come.

The agency is also considering requiring prospective borrowers to undergo a comprehensive financial assessment to try to make sure that the loan is suitable for them.

The Consumer Financial Protection Bureau, which has stepped up its oversight of deceptive reverse mortgage advertising practices, is also seeking public input to help shape rules and policies in the future. The consumer watchdog agency says it has heard from older people who say ads make reverse mortgages look easy and risk-free.

CredAbility's Sue Hunt, for one, welcomes tighter rules because she expects reverse mortgages to gain in popularity in the coming years as people live longer and seek ways to supplement their savings, such as the 102-year-old woman who recently called her office.

"She said, 'I guess neither God nor the devil want me, so I'll have to do a reverse mortgage,' " Hunt says. "A reverse mortgage can be a good tool. But it needs to be part of an overall retirement plan, not a reaction to an immediate crisis."

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