When financial instruments are backed by government money, regulators have twin obligations to make sure they are sound: to protect consumers and taxpayers' liability. When it comes to reverse mortgages, those protections appear lacking on both fronts, leaving too many Floridians vulnerable to overzealous pitches and taxpayers too often picking up the tab. It's time for the federal government to get serious about ensuring that homeowners know all the risks when they sign up for a reverse mortgage.
At the onset, reverse mortgages may seem like a simple, quick fix to money problems. But in reality they are complex deals that could leave homeowners owing more than their home is worth or facing foreclosure.
The Tampa Bay Times' Susan Taylor Martin reported last Sunday that reverse mortgages peaked in 2009 at nearly 115,000 as homeowners struggled during the recession. Touted by pitchmen such as actors Henry Winkler and Fred Thompson, the mortgages allow homeowners 62 and older to cash in their house's equity and stop making monthly payments. Upon death, homeowners' heirs can sell the house, pay off the reverse mortgage and keep any remaining money. If they cannot repay, the federal government picks up the tab. Borrowers risk default and foreclosure if they move or fail to pay property taxes or insurance.
The federal government requires credit counseling for potential borrowers before it approves a reverse mortgage. But large numbers of defaults in the Tampa Bay area alone suggest that tactic has done little to protect homeowners. Fran and Kenny Goodnow of St. Petersburg are a textbook example of what can happen when reverse mortgages go wrong. The couple bought their Kenwood home in 1989 for $40,000. After refinancing their home years earlier, the couple entered into a reverse mortgage agreement with James B. Nutter & Co. The company paid off the couple's $153,700 existing mortgage. When the Goodnows missed several insurance payments, the lender demanded they repay $217,000. In ill health and unable to pay, the couple, ages 71 and 87, must leave their home by July 25. Although they met with a credit counselor prior to obtaining a reverse mortgage, the Goodnows say they did not understand their obligation. Sadly, their story mirrors that of thousands of Floridans and other seniors nationwide.
Reverse mortgages can benefit seniors in need, but they are rife with potential pitfalls. They are best utilized by people who fully understand the risks and have the ability to be able to keep up with property tax and insurance payments. Young borrowers, those who plan to move soon or with uncertain income in the future are not good candidates. The government needs to ensure those messages are getting delivered because frankly, it's not in the lender's interest to do so.
When a borrower defaults on a reverse mortgage, lenders get repaid by the federal government, which ultimately passes the cost to taxpayers. That's a breeding ground for exploitation. Lenders must be required to be transparent and government needs to make sure that translates into borrowers fully understanding that what folksy pitchmen bill as a safe, financial windfall could actually be a cyclone if they are unprepared.