Reverse mortgages in the hot seat again

As more and more boomers reach retirement age, the need for them to create retirement income will become more acute.

This is especially true for the 41 percent of Americans between the ages of 55 and 64 who have no retirement savings at all. Without funds stashed away, many will turn to their home equity to produce income, either by refinancing their original mortgage, taking out a home-equity loan or line of credit, selling their home and downsizing, or obtaining a reverse mortgage.

The latter option seems logical, yet for years consumers have been mystified by these offerings, and their advisors have had a love hate relationship with them. So it’s not surprise the reverse mortgage market is only 1 percent of the traditional mortgage market, with 628,000 outstanding loans. And growth may not come easy, since the Consumer Financial Protection Bureau (CFPB) recently release a report indicating the top complaints consumers file about reverse mortgage: loan terms, servicer runarounds, and foreclosure problems.

“Consumer complaints tell us that the complex terms of reverse mortgages continue to be misunderstood,” said CFPB Director Richard Cordray. “As more baby boomers choose reverse mortgage to tap into their home equity, they need to understand the unique terms and features of this product.”

To this end, CFPB has produced a new consumer advisory that highlights three ways that borrowers can protect their heirs once the loan comes due.

As for complaints, CFPB says its study revealed a big disconnect between consumer expectations and how reverse mortgages actually work. For example, the top three complaints included:

1. Distress about the inability to add new borrowers to an existing loan