A wave of retiring U.S. Baby Boomers may lead to an increase in unconventional loans known as reverse mortgages in coming years, but the practice comes with risks, according to a report released Thursday by the Consumer Financial Protection Bureau.
Homeowners over the age of 62 can use reverse mortgages to borrow against the value of their homes, without being required to make monthly payments. Instead, interest is added to the balance each month, with payment required only when the home is sold, or when the borrower moves out or dies. The practice differs from traditional home equity loans, which usually require monthly payments. Homeowners must continue paying property taxes and maintenance costs for both loan types.
Currently, only 2 to 3 percent of eligible homeowners are using reverse mortgages, with around 70,000 originated each year. But Baby Boomers, who make up more than 32 million homeowners, began becoming eligible for reverse mortgages in 2008, and will continue to widen the potential market.
Most reverse mortgages are insured by the Federal Housing Administration's Home Equity Conversion Mortgage program, which guarantees access to the loans. The program was seen as a way for seniors to stay in their longtime homes and use the loan as a regular income stream to pay for expenses.
But according to the report, most borrowers are instead taking a lump sum and using the money to pay other debts early, thereby getting out of monthly payments. The risk is that they will instead hold the accumulating debt of the reverse mortgage that may eventually exceed the value of their homes. Spouses and other family members may also be held liable for payment if the borrower dies or is forced to move.
The Consumer Financial Protection Bureau found that reverse mortgages were complex financial instruments that many borrowers didn't understand, and it is exploring for more education efforts. It is also seeking comments on the report over the next 60 days. Although it credited tightening federal regulations for improving lending conditions, the agency said it was prepared to take enforcement actions if necessary.