Predatory Loans Target Vulnerable Populations with Reverse Mortgages

Inside Subprime: June 14, 2019

By Lindsay Frankel

According to a new investigation conducted by USA Today Network, almost 100,000 reverse mortgages defaulted in the past few years, and low-income minority communities were impacted the most. More than 1.3 million loan records were analyzed as part of the investigation.

The investigation also revealed that reverse mortgages in areas with predominantly black residents are six times more likely to end in foreclosure than reverse mortgages in white neighborhoods, and the disparity was significant even when comparing low-income neighborhoods. Brokers have been known to advertise door-to-door in these areas.

Aggressive sales tactics and desperate borrowers have allowed the business of reverse mortgages to flourish. But in most default cases that USA Today analyzed, homeowners’ financial issues could have been remedied by a traditional second mortgage or home equity loan, had the borrowers had easier access to credit or greater income.

A reverse mortgage is a loan often issued to a senior citizen who has nearly or completely paid off their mortgage, and the loan is backed by the United States Department of Housing and Urban Development. The borrower can request a lump sum, monthly credit, line of credit, or some combination. The owner’s home serves as collateral for the loan. Instead of requiring monthly payments, the loan is paid back after the homeowner passes away or leaves the home. But the loan can still fail if the borrower neglects to make tax or insurance payments or misses a deadline for completing paperwork. This leads the lender to foreclose on the borrower’s home.

Consumer advocates say reverse mortgages carry high interest rates and hidden fees while targeting low-income minorities and seniors, and lenders neglect to thoroughly explain the risks. Stephanie Moulton, associate professor of public policy at Ohio State University, said bad actors seek out financially strained borrowers who have few alternatives. “These areas had demand, and they couldn’t access credit any other way,” she said.

Industry representatives argue that foreclosure is a natural consequence of the homeowner’s death, and regulators noted that seniors are rarely evicted from their homes. But foreclosures can devastate neighborhoods, and California consumer advocate Sandy Jolley said they’re failures no matter what the circumstances. “No consumer gets into one of these thinking, ‘Eventually my home will go into foreclosure.’ All foreclosures are unnecessary, and this increase indicates a failure of the program to deliver on its promise.”

The industry has also been criticized for its deceptive advertising practices. The Government Accountability Office uncovered “examples of marketing claims that were potentially misleading because they were inaccurate, incomplete, or used questionable sales tactics” as early as 2009.

Changes are needed to help seniors avoid losing their homes, and some lawmakers are attempting greater oversight. A proposal introduced by Reps. Maxine Waters, D-Calif., and Denny Heck, D-Wash, attempts to prevent home loss by requiring lenders to take steps between default and foreclosure.

While reverse mortgages may help some seniors stay in their homes without using more costly methods of borrowing, such as payday loans, the high number of loan defaults is concerning, and reverse mortgages still present risks that may not be appropriate for vulnerable seniors to take on.

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