Reverse mortgages: the celebrity pitchmen aren’t even the worst part
For years, there’s been a steady stream of stories laying out what was wrong with the US mortgage market. Now, the Consumer Financial Protection Board (CFPB) is out with a report on reverse mortgages, which allow the elderly to tap into accumulated home equity without selling their homes. Monetization: it’s not just for the kids anymore!
In concert with their report, the CFPB has a good explainer of what exactly a reverse mortgage is. (Hint: “it is a loan”.) The NYT has a good wrap up of the some of the problems with reverse mortgages laid out by the CFPB. For starters, there other, cheaper ways of doing the same thing (home equity loans or lines of credit). Worse, seniors are increasingly choosing to take the lump sum payment to refinance their existing mortgage or pay off other debt. That’s a dire window into the finances of America’s grandparents.
Credit is tight and all but unavailable to many Americans who need it. It would be great if reverse mortgages were an incremental solution to that problem. However, indebted seniors using reverse mortgages to pay off other debts are more exposed to financial risks like unexpected medical bills or home repairs after taking out a reverse mortgage:
While they gain additional cash flow…they lose the ability to use their home equity as a cushion against other major expenses…Reverse mortgage borrowers in their 60s, especially those seeking to refinance a sizeable traditional mortgage balance, are at higher risk than other borrowers of finding themselves with few financial resources with which to cover unexpected expenses or finance a move later in life. Prospective borrowers in their 60s with few other retirement resources may simply be prolonging an unsustainable financial situation by using a reverse mortgage to refinance a traditional mortgage.
Over-leveraged seniors aren’t helped by more borrowing, but that’s exactly what the reverse mortgage industry is pitching. There’s also a changing competition dynamic in the industry that doesn’t get the attention it deserves. Wells Fargo and Bank of America, who previously had 36% market share, exited the business in 2011. MetLife, who had been the third largest originator, swooped in and picked up 25% share. But MetLife is dropping its banking charter and is now exiting reverse mortgages. So here’s the most recent reverse mortgage league table from the CFPB (MetLife is shaded because it’s no longer accepting new business):
This means that the league table of reverse mortgage origination from here on out is going to be filled with smaller firms with little to no headline name recognition. And the market shares differences between them are slight, and from each of their perspectives, probably surmountable. The CFPB thinks that’s a dangerous dangerous dynamic: “The changing economic and regulatory landscape faced by these small originators creates new risks for consumers”. They could, in a fit of shockingly old fashioned behavior, compete by lowering fees and other costs. Unfortunately, it seems more likely that they’ll compete for share of seniors’ home equity by making their marketing even more agressive.
And some of the marketing that’s out there is already questionable. The day-time TV ads featuring washed-up celebrities like Henry Winkler are pretty bad. Phrases like “still own your home”, “true financial security”, and “tax free cash” flash on the screen. Getting The Fonz or another washed-up celebrity to pitch your financial product in low-budget ads on day-time TV doesn’t say a lot about your commitment to fair and honest marketing.
But the marketing mailings go beyond questionable. Here’s the CFPB running through the legal trouble one reverse mortgage company has gotten into:
Between 2008 and 2010, regulators in Florida, Illinois, Maryland, Massachusetts, Virginia and Washington brought allegations of deceptive marketing or consumer fraud against American Advisors Group of Irvine, California (AAG). The allegations centered on multiple direct-mail solicitations marked “Notice of 2008 Government Benefits” or “2009 Economic Stimulus Plan – HECM Program” that could have created the impression that the product being offered was a benefit and not a reverse mortgage loan. The marketing also contained the Equal Housing Opportunity logo, identified “Administrative Offices” as the sender of the mailing, and told consumers that they had been “pre-selected” and that they would have to make “NO MONTHLY PAYMENTS of any kind on proceeds.
Those claims are deceptive and AAG agreed to stop making them and paid very small “administrative penalties” in the thousands of dollars. That only makes the case for tighter and more centralized regulation of the market. That way, when reverse mortgage companies get caught misleading customers, regulators will have a understanding of the full extent of the wrongdoing, and can at least try to drive a hard bargain on the penalty.
More broadly, the CFPB report shows that reverse mortgage companies are not helping many of their customers — and that as baby boomers continue to age, proactive regulation, not just enforcement of blatant consumer fraud, is needed to keep it from getting worse. The last thing we need now are companies selling seniors clever new financial products that don’t pass muster on close examination.