Know someone over 50 who is making a difference? Nominate them for the AARP Purpose Prize. Nominations close March 31!
by Carole Fleck, AARP Bulletin, October 7, 2009
A word of caution to older Americans considering reverse mortgages: Tread carefully.
According to a report by the National Consumer Law Center (NCLC) released Tuesday, some of the same lenders that sold risky subprime loans to millions of homebuyers—fueling the real estate boom and bust—are now targeting older people with misleading claims involving reverse mortgages.
Some ads pitch reverse mortgages as “free money” and fail to disclose the fees or terms of the loan. Then there are brokers who use aggressive sales tactics to persuade older homeowners to take out reverse mortgages, even when it’s not in the homeowner’s best interest, because brokers receive high fees from these loans.
Reverse mortgages are typically used by older homeowners who need to cash out some of their equity to supplement Social Security, in order to pay living expenses, unexpected medical costs or home repairs. Homeowners must be 62 or older to qualify, and must have substantial equity in their homes.
In this type of mortgage, the lenders advance money—the current maximum is $625,000—to the homeowner as a lump sum, in monthly payments or as a line of credit. The older the homeowner and the higher the home equity, the more money a reverse mortgage will yield. Lenders are repaid when the owner moves or by the heirs when the owner dies.
The number of reverse mortgages insured by the federal government has soared in recent years, from 7,781 in 2001 to 112,000 in fiscal 2008. Now, the Boston-based NCLC warns that the $17 billion reverse mortgage industry may become the next subprime crisis.
“In the reverse mortgage market, seniors face some of the same aggressive lending practices that were common in the subprime lending boom,” says Tara Twomey, an NCLC attorney and author of the report. “Well-funded marketing campaigns and perverse incentives to brokers are targeting seniors’ home equity and using reverse mortgages as their tools.”
To curb reverse mortgage scams and questionable practices, stronger consumer protections are needed, the report said. They include better counseling and the implementation of a suitability standard, which would require lenders to offer reverse mortgages that are in the best financial interests of their clients.
Sen. Claire McCaskill, D-Mo., who attended the NCLC’s briefing to release the report, says she plans to introduce legislation to improve regulation of the industry and to better protect consumers.
“Abuses in the subprime lending market almost brought down our economy,” she says. “Now we’re seeing similar abuses with reverse mortgage lending. Something needs to be done before more life savings are depleted and more tax dollars are drained.”
Carole Fleck is a senior editor at the AARP Bulletin.
Please leave your comment below.
You must be logged in to leave a comment.
Get tips and resources to protect yourself from fraud and see the latest scam alerts in your state.
Members save 15% on in-store purchases of frozen yogurt, treats and apparel.
Exclusive program for members from The Hartford.
AARP members receive exclusive member benefits & affect social change.
You are leaving AARP.org and going to the website of our trusted provider. The provider’s terms, conditions and policies apply. Please return to AARP.org to learn more about other benefits.
Your email address is now confirmed.
Manage your email preferences and tell us which topics interest you so that we can prioritize the information you receive.
Explore all that AARP has to offer.
In the next 24 hours, you will receive an email to confirm your subscription to receive emails
related to AARP volunteering. Once you confirm that subscription, you will regularly
receive communications related to AARP volunteering. In the meantime, please feel free
to search for ways to make a difference in your community at