Financial advisors have been wary about reverse mortgages for decades—in fact, since their introduction in 1961. But the growing need of the baby-boom generation for retirement income, along with the advent of lower-risk loan options, suggests a potential renaissance in reverse mortgages. Mindful of these two trends, the new Consumer Financial Protection Bureau (CFPB) has released a report cautioning the public to look before they leap into reverse mortgages. The National Ethics Association encourages advisors to exhibit similar caution.
"Reverse mortgages are complex and have the potential to become a much more pervasive product in the coming years as (baby boomers) enter retirement," said CFPB Director Richard Cordray. "With one in 10 reverse mortgages already in default, it is important that consumers understand what they are signing up for."
Advisors can play a key role in this education effort.
STEP 1 should be reading CFPB's report, which was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. In assessing the reverse mortgage marketplace, the report identified the following concerns:
A pervasive lack of consumer understanding. Specifically, consumers are struggling to understand how their loan balance will rise and their home equity will fall over time with such a loan. Furthermore, many borrowers do not understand they need to continue to pay taxes and insurance if they wish to avoid foreclosure.
A growth in the number of younger borrowers. The report found that consumers are getting reverse mortgages at younger ages (commonly at age 62, the first year of eligibility). This means such borrowers will have fewer resources to pay for everyday and major expenses later in life.
