The U.S. consumer watchdog will boost oversight of the reverse mortgage market as borrowers with limited information take out complex loans earlier in life, according to a report released on Thursday from the Consumer Financial Protection Bureau.
The market for reverse mortgages, in which people age 62 and older borrow against the value of their homes without having to make payments while they live in the home, remains small. Only 2 to 3 percent of eligible homeowners have a reverse mortgage.
But the consumer agency said the loans could grow in popularity as more baby-boomers retire, and changing trends in borrowers’ use of the loans are making them riskier.
Since the 1990s, the proportion of borrowers in their sixties has more than doubled to 47 percent.
“Because reverse mortgages can help older homeowners ease the strain of retirement, this product can be beneficial if seniors choose it based on a solid understanding of how it works,” said Richard Cordray, the consumer agency’s director.
“But in some situations, the product can be misused in ways that harm borrowers,” he said.
Congress directed the Consumer Financial Protection Bureau to study the reverse mortgage market as part of the 2010 Dodd-Frank financial oversight law that also established the still-controversial watchdog agency.
The study could eventually lead to new federal regulations for the reverse mortgage market.
The loans can provide a source of income to help older people remain in their homes, Cordray said. Borrowers are responsible for property taxes and homeowners insurance but can defer loan payments while they still live in the house.
But the report found that almost half of reverse mortgage borrowers in fiscal year 2011 were younger than 70 and that more than 70 percent of people withdrew all the available funds at once rather than receive regular payments or use the funds as a line of credit.
These trends boost the likelihood that borrowers will run out of money or face foreclosure later in life, the agency said. Almost 10 percent of reverse mortgage borrowers as of February 2012 were at risk of losing their homes to foreclosure.
Misleading advertising about the products and inadequate counseling for potential borrowers also could lead people to unknowingly enter into risky loans, the agency said.
“In order to protect people against the misuse of reverse mortgages, we need to educate and inform not only older Americans but also the caretaker generation,” Cordray said.
The agency has established an interactive tool on its website to answer questions about financial products including reverse mortgages, and it will look into further regulations and enforcement actions to prevent false advertising and other problems, the report said.
The Federal Reserve in 2010 proposed rules that would have regulated advertising and improved disclosures consumers receive for reverse mortgages. The Dodd-Frank law shifted responsibility for regulating reverse mortgages to the CFPB as of July 2011.