Reverse mortgage defaults prompt changes to counseling services

January 24, 2011

Carmen Fernandez (R) and others rally to ask state lawmakers to stop home foreclosures and help modify loans at the State Capitol in Sacramento, California November 25, 2008.  REUTERS/Max Whittaker Federal regulators and lenders are moving to address a growing problem with defaults on reverse mortgages. Last week, I detailed how defaults can happen on these loans to seniors, and a new initiative by the U.S. Department of Housing and Urban Development (HUD) to beef up counseling services as part of a broader effort to deal with non-performing loans.

The new HUD initiative comes in the wake of criticism of the reverse mortgage industry’s marketing and consumer counseling practices. While it’s impossible to make a direct connection between the criticisms and the growing number of defaults, advocates argue that aggressive marketing has resulted in reverse mortgage sales in situations where the loans may not have been a good fit.

A June 2009 report by the U.S. Government Accountability Office (GAO) uncovered misleading advertising claims by lenders, including ads that implied HUD’s Home Equity Conversion Mortgage (HECM) is a government benefit (it’s not – HUD only regulates and insures the loans); that borrowers can never lose their homes; and that borrowers can never owe more than the value of their homes.

‚ÄúThere are some benefits to a suitable reverse mortgage,” says Norma Garcia, senior attorney at Consumers Union and co-author of a recent study critical of reverse mortgage lending practices. “But it’s for a very particular need and the industry has been marketing them as though they are good for everyone.”

Under federal law, potential HECM borrowers are required to go through pre-loan counseling sessions intended to make sure they understand HECMs and their risks. But the GAO study pointed to inadequacies in the counseling process, citing instances it uncovered where federal standards for pre-loan counseling were not met. GAO found instances of counselors who failed to discuss other lower-cost options available to potential borrowers outside of HECMs, and the financial implications of an HECM.

The report also found instances of inappropriate (and now illegal) cross-marketing of financial products such as deferred annuities or other insurance products alongside HECMs.

A spokeswoman for HUD notes that new counseling standards have been implemented since the GAO report. And earlier this month, HUD announced $3 million in new funding to housing counseling agencies to help them provide guidance to borrowers facing default. And the FHA recently beefed up the financial education required under the counseling program.

But the changes fall short of some of the Consumers Union recommendations, which include a ban on counseling over the phone. “Studies show problems with phone counseling,” Garcia said. “You can’t be certain the person you are talking with is the borrower, and if more than one person is involved, can you get them on the phone? There also are capacity issues with seniors, such as their ability to hear. And some services have problems conveying all the information in a short time. This is a very complex product to cover in just one or two hours.”

HECM borrowers who are in default should expect to be contacted by their lenders soon by mail. The letters will offer options including setting a re-payment plan, refinancing the loan or entering a HUD-approved loan counseling program.

There are five HUD-accredited counseling services for assistance:

National Council on Aging – (800) 510-0301
CredAbility – (888) 395-2664
Money Management International -(866) 765-3328
National Foundation for Credit Counseling– (866) 363-2227
NeighborWorks America – (888) 990-4326

If you live in Miami, Detroit, Houston or Los Angeles, it’s worth noting that The National Council on Aging just announced an industry-funded pilot program to provide counseling for borrowers in default.

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