The Consumer Financial Protection Bureau (CFPB) is eyeing new regulations for reverse mortgages. A recent CFPB report found that demand for the loans – restricted to borrowers 62 and older – is growing, but the product’s complicated structure and misleading marketing practices related to it are creating a minefield of hidden risks for consumers.
“Though many American are aware of reverse mortgages, they struggle greatly to understand this complicated product and the trade-offs involved,” Richard Cordray, director of the consumer bureau, said in a press statement accompanying the release of the CFPB report.
The study of reverse mortgages was mandated by the Dodd-Frank financial reform law, which also authorized the CFPB to develop regulations for the loans. Cordray said his agency “will consider measures to ensure that the reverse mortgage market is working well for consumers and responsible lenders.”
One of the major problems the report identified is confusion about how the loans work and about the obligations borrowers assume – specifically the obligation to pay property taxes and maintain homeowners’ insurance. Failure to do either could be grounds for foreclosure, voiding the guarantee (which reverse mortgage marketing materials emphasize) that borrowers can remain in their homes until they die or choose to leave voluntarily.
“A surprisingly large” proportion” of borrowers (9.4 percent) took their loans in a lump sum rather than in incremental payments, the CFPB report said, creating the risk that owners would not be able to meet their financial obligations under the note, and/or that they would lack the resources needed to finance future living expenses or a move to an assisted living facility or nursing home.
“People often have misconceptions about how their needs may change as they age in their homes,” Cordray noted in his statement. “Some are unaware that a reverse mortgage is a loan, let alone one with negative amortization, as the loan balance rises over time.”
The CFPB report also notes, with concern, that the number of consumers taking reverse mortgages as soon as they become eligible (at 62) has jumped dramatically in the past decade. Nearly 10 percent of reverse mortgage borrowers were 62 last year compared with only 2 percent during the 1990s; nearly half of recent borrowers are 69 or younger, according to the report.
The CFPB said it intends to “consider measures to ensure that the reverse mortgage market is working well for consumers and responsible lenders.”
Consumers Union, which has been highly critical of reverse mortgages in the past, said the report confirms “a pressing need to look more closely at the issues.” The loans can work well for some borrowers, Norma Garcia, a senior attorney with the advocacy group, told the New York Times. “But it has to be the right borrower and it has to be the right loan.”
Although emphasizing its concerns about reverse mortgages, the CFPB also noted favorably the national consumer education program an industry trade group, the National Reverse Mortgage Lenders Association (NRMLA) has developed. That program, dubbed “Borrow with Confidence,” explains the benefits and risks of reverse mortgages, and details (in a 19-point pledge) consumers’ rights and what they should expect from lenders.
"Through our ongoing public education efforts, the [NRMLA] is aggressively trying to help seniors avoid short-sighted or misinformed choices," Peter Bell, the association’s president, said in a press statement. "We share the CFPB’s concern that seniors and their adult children need a more in-depth understanding of reverse mortgages. Our new outreach campaign aims to give consumers the resources they need to make informed and deliberate decisions about their retirement security."
AT LONG LAST — FLOOD INSURANCE
Congress finally did what it has been unable to do for the past three years: Revamp the National Flood Insurance Program and reauthorize it for several years. That action, a month before the program’s authorization was set to expire, avoided both another of the short-term extensions Congress has approved, and another costly and disruptive lapse. The National Association of Realtors estimates that two-month lapse that occurred in 2010, before Congress finally agreed on a short-term extension, forced the cancellation of 1,400 home sales per day.
Lawmakers have long agreed that the insurance program, run by the Federal Emergency Management Association (FEMA) had to be restructured, but they have been unable to agree on the changes required. The compromise approved by the House and Senate extends the program for five years and stabilizes its finances (battered badly by payouts after Hurricane Katrina and other hurricanes in an exceptionally stormy 2005) by giving FEMA more discretion to boost insurance rates and by limiting coverage to primary residences, excluding vacation homes, which had been covered in the past. The legislation also strengthens FEMA’s floodplain mapping program and makes it easier for the agency to move, raze or deny coverage for homes that produce repetitive insurance claims.
The White House released a statement applauding the measure, saying it will “reduce flood risk and increase the resiliency of communities to flooding.... Transitioning to actuarially sound rates [will] enable policyholders and communities adjust to risk-based premiums,” the statement added.
Mortgage lenders in Massachusetts and probably beyond dodged a huge legal and financial bullet, thanks to a long-awaited decision by the state’s Supreme Judicial Court (SJC). In this closely-watched case (Eaton v. Federal National Mortgage Association), the court ruled that lenders or servicers must possess both the mortgage and the note in order to foreclose. That was the key issue raised by the borrower (Eaton) in challenging the foreclosure on her home, and it would appear to affirm her position. But the court did much to soften that blow to lenders, first by declining to make the ruling retroactive – avoiding what industry executives had warned would be an “apocalyptic” result for the real estate market. – “a direct threat to orderly operation of the mortgage market,” is how the Federal Housing Finance Agency, which regulates Fannie Mae, described it in a rare amicus brief filed in the case.
The court had signaled its concern about the impact of its ruling requesting additional briefs on the impact of a decision requiring unity of the mortgage and the note and apparently took the industry’s warnings to heart by making its affirmative answer to that question prospective only. The court also made it clear that while unity is required in a foreclosure action, the foreclosing entity need not actually have possession of the note; it need only document that it represents the note’s holder. The decision also established a mechanism for meeting that requirement, outlined in a footnote stating that the note holder or the servicer could file a statutory affidavit with the registry of deeds confirming that it either holds the promissory note or is representing the entity that does.
Consumer advocates claimed the decision as a victory for them, saying it clearly requires financial institutions to document their ownership of the loan, closing legal loopholes that fueled the robo-signing abuses. “You still have to show that someone else is actually the note holder,” Adam Levitin, a law professor at Georgetown University, who submitted a brief supporting the plaintiff in this case, told American Banker. That could be problematic for lenders, Levitin noted, if, as has often been the case in the past, loans in securitize pools have not been properly assigned.
But the victory was larger for lenders, Rich Vetstein, Massachusetts real estate attorney, who has written extensively about this case, observed. “First, the Court made the explicit point that lenders do not have to physically possess both note and mortgage to be deemed a “holder” able to foreclose. This is huge given the pandemic paperwork deficiencies common with securitized mortgage trusts,” Vetstein blogged recently. Additionally, the footnote allowing a “statutory affidavit” to establish authority to foreclose “opens the door wide open for servicers and MERS (the electronic recording system that has been threatened by foreclosure challenges) to establish that they are authorized to foreclose, and acting on behalf of the securitized trusts who hold legal title to the mortgages.”
This decision is by no means the last word on foreclosure challenges, however, Vetstein emphasized. “As with most landmark cases pronouncing a new rule of law,” he wrote, “subsequent litigation to clarify what the court meant is likely to follow in this case.”
Saving for a rainy day is a concept most Americans approve but few appear to practice. Only 25 percent of the respondents to a recent Bankrate.com survey said they had enough in emergency savings to cover at least six months of expenses; 28 percent said they had no emergency savings at all, up from 24 percent in that situation last year. Only about half (51 percent) had a three-month reserve cushion a worse performance than last year when 54 percent said they could manage for three months if their income disappeared, but better than six years ago, when only 39 percent had a three-month reserve.
“The needle has moved a little bit, relative to a year like 2006, but this is more of an indication of how woefully undersaved Americans were during the 'go-go days' of the housing boom," Greg McBride., senior financial analyst for Bankrate.com, told the Chicago Tribune.
Although the savings statistics may not be impressive, consumers themselves are feeling better about their financial condition generally and their savings specifically. Nearly 25 percent of the respondents said their finances were in better shape than a year ago, and while 32 percent said they are “less comfortable” with their savings now, nearly half (47 percent) said their savings situation had improved.
A DOUBLE-EDGED SWORD
Talk about a double-edged sword. The housing market is showing glimmers of a sustainable recovery after the steepest and most prolonged downturn in recent memory. The bad news in what would seem to be an unambiguous good news story: As the market improves, affordability worsens, making it more difficult for prospective buyers to hop aboard the ownership train. Would-be buyers forced to remain in the rental market, in turn, are slowing the normal turnover, reducing vacancy rates and putting upward pressure on rents, creating affordability strains for renters, as well.
Harvard’s Joint Center for Housing Studies described that dilemma in the 2012 report on the “State of the Nation’s Housing” - the 25th edition of that annual assessment of housing conditions.
Mortgage denial rates for minorities remain high, creating affordability problems for them on the ownership side, while rising rents and shrinking federal housing assistance programs are creating acute affordability problems in the rental market – problems the Joint Center report warns, could be exacerbated by the emphasis on slashing the federal budget.
“Now is not the time to cut back on housing programs that have had demonstrated success in providing a springboard to opportunity for many of the nation’s most vulnerable households,” the report cautions.
Joint Center researchers identified few positives as the nation emerges slowly from the recession that has virtually paralyzed the housing market for the past four years. “The housing market outlook [is] significantly brighter than a year ago,” the report notes, “but [as this year began] the ingredients needed to spark more normal household growth were still not in place.”
‘Echo-boomers’, between 23 and 30, are as anxious as prior generations to be homeowners, and represent a larger pool than baby boomers, who pushed housing demand and homeownership to record levels, the report notes. But student loan debts and a weak job market are forcing many to live with their parents, delaying their creation of independent households.
Negative equity, the slow foreclosure process and sluggish economic growth, meanwhile, are creating strong headwinds as the housing market struggles to regain its footing. “The sheer depth of the downturn and scale of mortgage debt overhang mean that it will be some time before a robust housing market recovery is at hand,” the report concludes.