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Senator McCaskill provides Reverse Mortgage Fact Sheet...Emerging problems bring renewed resolve

A year and a half ago, U.S. Senator Claire McCaskill first began investigating the myriad of problems associated with reverse mortgages, including predatory lending, aggressive marketing, and the potential risks to the federal government by insuring the loans. 

After a congressional hearing, McCaskill pursued and passed legislation to protect seniors, but newly emerging unscrupulous practices have renewed her efforts to reform the industry. 

For many elderly homeowners, the equity in their homes represents their largest asset—created through a lifetime’s hard work and savings.  Unfortunately, this makes seniors a target for predatory lenders and fraud perpetrators who seek to take advantage of them.

Because reverse mortgages can be a complex and confusing issue, our office compiled a set of frequently asked questions to help clarify the issue, as well as bullet points outlining McCaskill’s role in reforming the industry and protecting seniors from abusive practices. 

Summary of McCaskill’s actions on reverse mortgages:

December 12, 2007 – Held a Senate Special Committee on Aging hearing to examine the rapid growth and problems associated with reverse mortgages.

December 14, 2007 – Introduced legislation to protect seniors from aggressive marketing and predatory lending in the reverse mortgage industry.

February 7, 2008 – Sent a letter to the Government Accountability Office (GAO) requesting an investigation into potential abuse in the reverse mortgage market. 

April 3, 2008 – Introduced an amendment to curb aggressive marketing and predatory lending in the reverse mortgage industry.  The amendment is offered as part of the Foreclosure Prevention Act.

April 10, 2008 – Won Senate approval of her amendment to address problems in the reverse mortgage industry and protect homeowners.

April 10, 2008 – Advocated for a Senior Advocate at the Federal Trade Commission, citing predatory practices in the reverse mortgage industry, Craftmatic beds, and telemarketing scams targeting the elderly.

April 21, 2008 – Asked Attorney General Jay Nixon to investigate inappropriate marketing of reverse mortgages to Missouri seniors.

July 31, 2008 – McCaskill’s reverse mortgage amendment was signed into law by President Bush as part of the Housing and Economic Recovery Act of 2008.

September 22, 2009 – AARP presented McCaskill with an award for her legislative work to protect senior citizens from aggressive marketing and predatory lending in the reverse mortgage industry

April 23, 2009 – Introduces new legislation to address emerging problems in the reverse mortgage industry.

Frequently Asked Questions

What is a reverse mortgage?

A reverse mortgage is a type of loan that allows elderly homeowners to convert the equity in their homes into cash.  It is different than a home equity loan or a second mortgage because the borrowers do not need to repay the loans as long as they meet certain conditions (for example, they must continue to live in the home, maintain the property, pay property taxes and insurance, etc.).  Nearly all reverse mortgages are insured by the federal government through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program.

Why are they problematic?

Reverse Mortgages aren’t bad in every situation.  If a senior is left with no remaining resources and can’t pay their basic living expenses, a reverse mortgage may be an appropriate option to consider. However, they have the potential to financially devastate a low-wealth senior, and should be used judiciously.

The costs associated with reverse mortgages—including fees and interest charges—can be substantial.

Aggressive marketing has targeted seniors, encouraging them take out reverse mortgages—against their best interests—to take vacations, remodel their homes, purchase deferred annuities or life insurance or make other investments. 

Some reverse mortgage lenders/brokers advertise the fact that the HECM loan is insured and regulated by the Federal Housing Administration to mislead seniors into thinking that the program is a safe financial choice, sometimes even misrepresenting the loans as a “government benefit.”

The Federal Housing Administration estimates it may lose $800 million from insuring these loans in the next fiscal year.

What has been done to improve the situation?

In late July 2008, the president signed into law several reforms to the HECM program as part of the Housing and Economic Recovery Act of 2008.  HUD is still in the process of implementing these protections.  The legislation:

Prohibits financial product sales agents from serving as HECM loan counselors.

Repeals a provision in existing law that offers incentives to purchase long-term care insurance with a reverse mortgage.

Prohibits any requirement to purchase insurance or investment products as a condition of taking out a federally-insured HECM.

Requires HECM loan counselors to be certified by the Federal Housing Administration (i.e., counselors must meet qualification standards and follow established protocols).

Requires a study in consultation with consumer advocates to determine further appropriate consumer protections and the suitability of reverse mortgages for consumers.

What is next?

This month, the GAO is expected to release a report – originally requested by McCaskill – which will examine the reverse mortgage industry.  In the meantime, she is pursuing new legislation that would further strengthen consumer protections and help detect and prevent fraud.  The new legislation would:

Require lenders to make reasonable inquiries and have reasonable grounds for believing that the reverse mortgage is suitable for the borrower before making the loan;

Require lenders, brokers and counselors to report suspected fraud or abuse to the appropriate agencies for investigation;

Provide specific criminal penalties and enhanced sentencing guidelines for fraud involving HECM loans or perpetrated against borrowers;

Require that advertising for reverse mortgages cannot be false or misleading;

Prohibit lenders and counselors from selling or disclosing borrowers’ personal information to others for marketing purposes; 

Prohibit lenders from requiring a borrower to withdraw all of the equity in the home as a condition of the reverse mortgage; and

Extend existing protections for borrowers of HECM loans to borrowers of proprietary reverse mortgages that are not federally insured.