Complex Decision-Making and Cognitive Aging Call for Enhanced Protection of Seniors Contemplating Reverse Mortgages

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Debra Pogrund Stark, Dr. Jessica M. Choplin, Dr. Joseph A. Mikels & Amber Schonbrun McDonnell

It was the best of loans, it was the worst of loans. For many seniors who are living on an inadequate fixed income with a home value that far exceeds any mortgage debt on it, a “reverse mortgage” might be a good method to address chronic cash shortages. Under this type of mortgage, the lender makes payments to the borrower that are not generally due until the senior passes away or moves from the home. Many seniors have expressed interest in this unique type of financing, and this number has grown exponentially in recent years, as there were ten times the number of seniors entering into reverse mortgages in 2007 as there were in 2001. But, as will be explained in this article, for many seniors a reverse mortgage loan can be a very costly and ineffective way to address their income needs or otherwise tap into their home equity for other purposes. The decision for any given senior as to whether a reverse mortgage is the best method to address inadequate fixed income or otherwise wisely use the equity they have in their home is a highly complicated one involving numerous factors, including a knowledge of other lower cost options that might be available and an understanding of the numerous risks inherent in this type of loan. Recognizing the complicated, high cost, and potentially unsuitable nature of reverse mortgages for many seniors, Congress enacted laws that require seniors to receive counseling to better understand its features before seniors can enter into federally insured loans. To better ensure that seniors receive adequate counseling on the nature of the loan product they are contemplating entering into and other lower cost options they could pursue instead, Congress amended the law in 2008 to require that counseling be performed by independent counselors, and in 2010 the U.S. Department of Housing and Urban Development (“HUD”) enacted a counseling protocol to further improve the quality of the counseling seniors receive. Nevertheless, currently 8% of federally insured reverse mortgage loans are in default, jeopardizing the continued sustainability of the entire program.

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