Unlike other ways to tap equity, like a cash-out refinance, home equity loan, or home equity line of credit (HELOC), you don’t have to qualify for a reverse mortgage by having a certain income or credit score and you don’t have to make any monthly payments on the loan. Instead, you repay the loan when you permanently move out, whether you’re headed to a different home or a healthcare facility or you've passed away.
However, a reverse mortgage is not a suitable financial product for every older homeowner, and the way some lenders or loan officers market reverse mortgages can be predatory. Predatory lending benefits the lender at the homeowner’s expense by taking advantage of the borrower’s naïveté. When predatory lending targets older people, it can become a form of elder financial abuse.
- The inherent complexity of reverse mortgages makes them hard for people to understand, even people who work in the mortgage and financial planning industries.
- While not all reverse mortgage lenders and loan officers behave unethically, those who do so take advantage of the product’s complexity—combined with some older homeowners’ tight budgets and declining mental acuity—to sell them a product that’s not in their best interest.
- Reverse mortgage lenders do not have a fiduciary duty to their clients and may provide guidance that is not in a homeowner’s best interest.
Are Reverse Mortgages Predatory?
Reverse mortgages are not inherently predatory. They are a legitimate type of home loan that offers a unique solution to older homeowners seeking an extra source of cash.
They aren’t necessarily a tool of last resort, either. They can help older homeowners diversify their sources of income and reduce their risk of running out of money.
That said, loan officers, attorneys, contractors, and investment professionals have used these loans to defraud older homeowners, according to the FBI.
Ads featuring celebrities and seminars at churches and senior centers can be legitimate ways to reach this product’s target market, but can also be tactics to lure older homeowners into borrowing against their home equity using a loan product whose rules and consequences they may not fully understand.
USA Today published a series of investigative articles in 2019 describing predatory practices in the reverse mortgage industry. The news outlet found that reverse mortgages had been issued at disproportionate rates in lower-income, predominantly Black neighborhoods. They also found that foreclosures on these reverse mortgages were contributing to neighborhood blight and depressing the values of nearby homes.
Foreclosure can be the natural result of the last surviving borrower passing away leaving no heirs who can afford to pay off the loan. It can also happen when a homeowner defaults on their property tax or homeowners insurance payments or moves out. Older people were more likely to lose their reverse-mortgaged homes for these two types of default before the FHA implemented new rules to better protect homeowners in 2013.
The USA Today series may have overstated some dangers of today’s reverse mortgages, but it also brought to light how individuals, families, and entire communities have been harmed by these loans and how some members of the reverse mortgage industry have acted without integrity.
Incentives for Predatory Reverse Mortgage Lending
Mortgage loan officers don’t necessarily have a legal obligation to act in their clients’ best interests. They may have incentives—higher commissions, faster promotions—to act in their own best interest and their employer’s best interest. And they may have little mortgage-industry experience, let alone reverse-mortgage experience, before a lender hires them and trains them to work in the field.
For example, a key qualification to become a loan officer trainee at the nation’s highest-volume reverse mortgage lender, AAG, is a minimum of four years’ sales experience. Industry experience is preferred, but not required. Preferred skill sets include debt-settlement and subprime-lending experience. Pay consists of a base salary plus bonuses and commissions. By closing just four sales a month, a loan officer trainee could earn $90,000 annually with full benefits, according to the job posting.
What a reverse mortgage loan officer can earn per year by adding just one more closing each month.
All reverse mortgage lenders stand to earn several thousand dollars from each loan they close. On an FHA reverse mortgage, also called a home equity conversion mortgage (HECM), this fee is capped at $6,000. On a non-FHA, proprietary reverse mortgage, the lender’s fee may be substantially higher (in part because loan limits are higher).
Also attractive to lenders: FHA mortgage insurance protects HECM lenders against losing money on reverse mortgages. If the borrower’s loan balance is higher than the home’s value when the borrower moves out permanently or passes away, neither the homeowner, their estate, nor their heirs are responsible for the difference; the federal mortgage insurance fund makes the lender whole. Reverse mortgage borrowers contribute to this fund with the up-front mortgage insurance (UFMI) they incur when they take out the loan and the monthly mortgage insurance premiums (MIP) they incur every month they have the loan.
Another problem for both lenders and borrowers is that reverse mortgages are hard to understand, even for many people who work in the financial services industry. The homeowners who take them out may not understand what they’re signing up for. Some financial professionals may feel that homeowners are adults who are capable of making up their own minds. But most adults do not have a high level of financial sophistication.
Homeowners can’t make fully informed decisions if they don’t understand the product they’re signing up for and rely on a sales pitch from a loan officer who may not fully understand the product and its risks themselves. Further, many people lose their mental acuity as they age, and some older homeowners are lonely and isolated, overly trusting, or struggle to say no—characteristics that can make them vulnerable to financial predation.
What Are Some Possible Solutions to Predatory Reverse Mortgage Lending?
- Require loan officers to be fiduciaries.
- Hold companies responsible for the unethical behavior of their loan officers with severe penalties that are a true disincentive for bad behavior and a true punishment for breaking the rules.
- Increase the availability of in-person HECM counseling sessions to prevent subpar counseling sessions due to poor phone or video connections.
- Conduct public information campaigns to increase awareness of reverse mortgage risks and scams.
How Can Reverse Mortgage Borrowers Avoid Foreclosure?
- Live in the home as your principal residence (something you must certify in writing each year).
- Keep the home in good condition, on par with the FHA’s minimum property standards.
- Keep current with property taxes and homeowners insurance.
- If your loan requires you to carry flood insurance, you must also keep up with those premiums.
- If your home is in an association, you must stay current on homeowners’ association (HOA) fees.
Can I Change My Mind After I Sign?
You can typically cancel a reverse mortgage by notifying the lender in writing within three business days of signing your loan paperwork.
The Bottom Line
Reverse mortgages in and of themselves are not predatory, but the way some people working in the industry have advertised and sold them is. The fallout has been a loss of generational wealth in some communities, particularly Black communities; devastated adult children who had no idea their parents had reverse mortgaged their home; and homeowners and surviving spouses losing the ability to live in their own home over loan contracts they didn’t understand.