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Reverse Mortgages Ripe for Abuse

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.