Request for Information Regarding Consumer Use of Reverse Mortgages Docket No. CFPB Due: August 31, 2012

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1 August 31, 2012 Mr. Richard Cordray Director Bureau of Consumer Financial Protection 1700 G Street, N.W. Washington, DC Re: Request for Information Regarding Consumer Use of Reverse Mortgages Docket No. CFPB Due: August 31, 2012 AARP 1 appreciates the opportunity to submit this letter in response to the Request for Information Regarding Consumer Use of Reverse Mortgages, 77, Fed. Reg. No. 127 (July 2, 2012). Since the inception of the reverse mortgage market in the United States, AARP has advocated for consumer protections for all reverse mortgages, conducted research on reverse mortgage issues, and developed policy recommendations to address the changes in this market. AARP has a long history of advocating for a reverse mortgage market that provides consumer protections for older borrowers. In the mid1980 s, AARP supported the creation of the Home Equity Conversion Mortgage (HECM) pilot program. We believe that older Americans should have a means by which to access their home equity without having to sell their homes or take on loans that will stretch their already tight budgets. Recognizing the need to protect older, potentially vulnerable consumers from loss of home equity, AARP advocated for the requirement that HECM borrowers obtain housing counseling from HUD-certified providers prior to obtaining a reverse mortgage loan. In addition, the AARP Foundation helped develop the original HECM housing counseling protocol and ran the housing counselor training program until AARP urges the Bureau of Consumer Financial Protection to continue to research and analyze the reverse mortgage market, as this market has experienced many changes during the past several years. Among the notable changes are a decrease in the average age of borrowers, a sharp increase in the use of fixed-rate full-draw lump-sum payouts, and an increase in the cumulative tax and insurance default rate to 9.4 percent for all active HECM loans. 2 While these changes may reflect increasing financial stress of 1 AARP is a nonprofit, nonpartisan membership organization that helps people 50+ have independence, choice, and control in ways that are beneficial and affordable to them and society as a whole. We produce AARP The Magazine, AARP Bulletin, AARP Viva, NRTA Live and Learn, and provide information via our website, AARP publications reach more households than any other publication in the United States. AARP advocates for policies that enhance and protect the economic security of individuals. 2 According to HUD, 54,000 or 9.4 percent of active HECM loans were in technical default for nonpayment of taxes and/or homeowners insurance as of February

2 borrowers of all ages, they might also reflect changes in market practices, changes in consumer preferences or changes in financial advice offered to the age 62 and older population. Whatever the cause of these changes, the CFPB must ensure that consumers are being given all the relevant and important information, so that they can make a careful and informed decision about whether and how best to access their home equity. I. Factors influencing consumer decisions: 1. What factors are most important to consumers in deciding whether to get a reverse mortgage? There are many factors involved in the decision making process for reverse mortgages. AARP conducted a survey in 2006 of borrowers and non-borrowers who received counseling for a reverse mortgage. 3 At that time, 48 percent of people surveyed indicated that they were looking into a reverse mortgage to pay for necessities, while 38 percent were considering a reverse mortgage to pay for extras. The main reasons borrowers looked into a reverse mortgage were: to pay off a mortgage (19%); to improve their quality of life (18%); to pay for home repairs/improvements (14%); to have funds for emergencies and to meet unexpected needs (13%); to pay for everyday expenses (9%); to pay for health or disability expenses (7%); to pay off non-mortgage debt (6%); and to pay property taxes/homeowners insurance (4%). More recent research based on 2010 data, indicates that 67% of HECM counseling clients considered a reverse mortgage to lower household debt. 4 AARP research found that the top five main reasons people chose not to apply for a reverse mortgage were: costs of the reverse mortgage were too high (30%); decided loan was not necessary (10%); loan would make more sense in the future (9%); found another way to meet financial needs (9%); and like owning home free of mortgage debt (6%). 5 Despite the housing counseling program and its recently improved protocol, we are concerned that many consumers do not make informed or discerning decisions when they decide to obtain a reverse mortgage. According to the HECM counseling training manual: It is common to find out during the counseling session that borrowers have already signed a loan application for a fixed rate product, without understanding what that meant. 6 AARP urges the CFPB to conduct research into the consumer decision-making process, to examine the housing counseling process, and to work to strengthen the quality and effectiveness of counseling. 3 Donald L. Redfoot, Ken Scholen, and S. Kathi Brown, Reverse Mortgages: Niche Product or Mainstream Solution?, AARP Public Policy Institute, No , Washington, DC, December 2007, p Barbara R. Stucki, Changing Attitudes, Changing Motives The MetLife Study of How Aging Homeowners Use Reverse Mortgages, MetLife Mature Market Institute, Westport, CT, March 2012, p Redfoot et al., p HO 111: Home Equity Conversion Mortgages Training Manual, NeighborWorks America, Washington, DC, 2011, p

3 2. What factors are most important to consumers in choosing among products? Among other things, comments could address the choice between fixed-rate, lumpsum reverse mortgages and adjustable-rate, line-of-credit or monthly disbursement reverse mortgages. There are no hard data that demonstrate what factors most influence the product choice. Anecdotal information obtained from housing counselors indicate that many consumers seek the option that provides the highest amount of proceeds. This would explain why the HECM standard continues to be the most prevalent product, despite the fact that the upfront costs of the HECM saver are so much lower. Some have said that the prevalence of the fixed-rate product is due to the fact that consumers prefer fixed-interest rates over adjustable rates. In some cases, certain lenders may not offer the full range of HECM products, so consumers may not be aware of all loan options that are available in the market. Housing counselors have also indicated that they often meet with clients and discuss the cost implications of taking the full-draw lump sum which is required to get the fixed interest rate and that clients say they will be selecting an adjustable rate product because they do not need all the money at once. Then later, when following up with clients, they are told the client took the fixed-rate full draw option based on the advice of their lender. Housing counselors are prohibited from giving advice about lenders and loan types; they are only allowed to provide education and information. AARP urges the CFPB to consider developing a suitability standard for reverse mortgage lenders and brokers to ensure that a particular reverse mortgage loan is suitable given a borrower s needs. 3. What factors are most important to consumers in choosing among potential lenders? The most important factor that should be involved in lender selection is the ability to compare loan costs among different lenders. However, this comparison becomes very difficult as every lender may not offer the same loan types. Comparisons between HECM standard and saver loans, and adjustable rate and fixed-rate loans can become overwhelming to an unsophisticated borrower. Consumers should obtain loan quotes from at least three different lenders before proceeding with a loan. However, it seems that comparison shopping is often hampered by the complexity of loan and payout options. The CFPB should consider developing a template that would enable consumers to more easily compare different loan products with differing terms and costs between lenders, and to integrate this information into the forthcoming revised disclosure forms for reverse mortgage loans. II. Consumer use of reverse mortgage proceeds: 4. Nearly 75% of recent reverse mortgage consumers took out all of their available funds upfront in a lump sum. 3

4 Prior to 2009, most HECM loans were adjustable-rate loans. Fannie Mae was the main buyer of reverse mortgage loans and supplied the vast majority of liquidity to the market. Once Fannie Mae stopped purchasing reverse mortgage loans, the Ginnie Mae HMBS program was developed and became the main source of secondary market liquidity. This is one of several factors that have contributed to the increase in lump-sum fixed-rate loan originations. Since investors prefer fixed-rate loans, securitizers are willing to pay a premium for them and loan originators have a stronger incentive to market these loans. a. What do consumers do with these funds? Recent data indicate that most consumers seeking reverse mortgages have an existing mortgage that will need to be paid off with the reverse mortgage proceeds. It is likely that the majority of reverse mortgage funds are used for this purpose. 5. Some reverse mortgage consumers use reverse mortgage loan funds to refinance a traditional mortgage or home equity loan/line of credit. A requirement for obtaining a HECM loan is that there may not be any other existing liens on a property. Therefore, any existing mortgages or liens must be paid off before a borrower can obtain a HECM loan. a. What proportion of consumers are using reverse mortgage loan funds to refinance a traditional mortgage or home equity loan/line of credit? Based on loan-level data from 2000 through 2010, AARP estimates that 56 percent of reverse mortgage borrowers had a regular mortgage prior to the reverse; 5 percent of reverse borrowers refinanced an existing reverse mortgage loan; and 39 percent of reverse mortgage borrowers had no prior mortgage loan. 7 c. Do consumers using a reverse mortgage to refinance an existing mortgage typically consider other options first (e.g. moving to a different home or a traditional refinancing)? If not, why not? If so, what factors lead them to choose a reverse mortgage instead? It is difficult to know with any certainty what the decision making process is for individuals. Consumers may be influenced by the barrage of television commercials that imply reverse mortgages will make people safe and secure, without emphasizing that there are risks and obligations associated with these loans. The housing counseling protocol requires counselors to present other options to reverse mortgage counselees during the counseling session. Since the session is required to be held before a lender can finalize a reverse mortgage loan, potential borrowers should at least be aware of options available other than 7 AARP calculated these percentages based on reverse mortgage loan-level data obtained from CoreLogic for the years 2000 through

5 a reverse mortgage. However, many potential borrowers have already made a decision about the loan prior to entering counseling. 8 Many consumers use a reverse mortgage to pay off an existing mortgage in order to free up the cash flow required for the monthly mortgage payment. If borrowers have substantial equity in their home, but are struggling to make their mortgage payment, a reverse mortgage can ease the monthly strain. If a borrower has lost a job, he or she would not qualify for a traditional mortgage or home equity loan, but might still qualify for a reverse mortgage if there is enough equity in the home. However, reverse mortgage borrowers still must make payments for property taxes, homeowner s insurance premiums, and homeowner s association dues and assessments. 6. Some reverse mortgage consumers use reverse mortgage loan funds to consolidate non-housing debts. a. What proportion of borrowers use reverse mortgage loan funds to consolidate non-housing debts? According to the 2006 AARP survey, 25% of borrowers used their reverse mortgage proceeds to pay off non-mortgage debt. 9 b. What types of non-housing debts are typically consolidated (e.g. credit card, auto, medical-related debt, etc.)? Borrowers who considered using a reverse mortgage to pay off non-mortgage debt indicated that they were considering paying: car loan (19%); health or drug costs (19%); taxes (26%) and credit cards (70%) with their proceeds. 10 The survey did not collect data on which types of non-mortgage debts were actually paid with reverse mortgage proceeds. III. Longer-term outcomes for reverse mortgages borrowers: 7. Consumers typically pay off their reverse mortgage loans earlier than would be expected based on underlying mortality rates. a. Why do consumers typically pay off their reverse mortgage loans early? Data on this point is not currently available. If a borrower moves out of the home permanently, the note becomes due. Researchers at Ohio State University recently received grant funding from the MacArthur Foundation and HUD to conduct a study of 8 HO 111: Home Equity Conversion Mortgages Training Manual, NeighborWorks America, Washington, DC, 2011, p Redfoot et al., p Ibid, p 55. 5

6 reverse mortgage borrowers, including why people have terminated their loans prior to death. 11 b. Do consumers anticipate being able to pay off a reverse mortgage at a specific time (e.g. upon receiving a pension or retirement benefit) when taking the reverse mortgage loan? Data on this is not currently available. However, several recent articles in the financial planning literature advocate the use of a reverse mortgage to delay drawing down retirement plan balances when asset prices are depressed, and then paying off the reverse mortgage at a later date when asset prices recover. 12 One lender has prepared an advisory document for its team of financial advisors advocating that clients delay taking Social Security until full retirement age and use a reverse mortgage to finance needs instead. This document showed the cash flow benefits of the strategy, while omitting any data on the cost of the reverse mortgage loan, and no reference at all to the long-term costs of this strategy. Other reverse mortgage lenders are also recommending this strategy. 13 While data show that many people are unprepared for retirement, advising people to tap home equity at an early age, thereby depleting most people s largest asset, is a risky strategy. At a minimum each borrower s individual circumstances should be evaluated before suggesting such a plan. AARP urges the CFPB to investigate whether it is appropriate to suggest financing a delay in applying for Social Security benefits with a reverse mortgage loan. c. Do consumers who pay off their loans early typically feel that the loan was a good choice? Are there things they wish they had done differently? Data on this are not currently available. The Ohio State University study should be able to provide some insight on this in the future. 8. Some consumers pay off a reverse mortgage upon moving out of a home. A HECM loan becomes due and payable when the last surviving borrower moves out of the home permanently. a. Why do consumers decide to move? Are such moves typically because the move is planned in advance or because the move is required for health or other reasons? There are no data available on why reverse mortgage borrowers have chosen to move out of their homes. However, data from the National Association of Realtors examines the 11 MacArthur Awards $2.7 Million to Support Research on How Housing Matters, Press Release, March 13, 2012, available at: 12 Barry H. Sacks and Stephen R. Sacks, Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income, Journal of Financial Planning, February Jim Veale, Using HECMs to Increase Social Security Benefits? Reverse Mortgage Daily, January 6,

7 primary reason for selling a home by age. For home sellers in 2011, age 65 and older, the main reason for selling was to move closer to family, followed by downsizing, and upkeep of home too difficult due to health or financial reasons. 14 Other reasons were cited less frequently, such as moving due to retirement, avoiding possible foreclosure, decline in neighborhood desirability, and cannot afford the mortgage and expenses. 9. What are the typical outcomes for borrowers who still have the loan after 5 years or more? The Ohio State study will provide some insight into this question. The 2006 AARP study consisted of borrowers who had taken out reverse mortgage loans during a three year period, so it only captured information on borrower experiences in the short-term. a. Does the loan continue to meet borrowers' financial needs 5 or more years after origination? The AARP survey found (after three years or less since origination), reverse mortgages met the financial needs of borrowers: completely (58%); mostly (25%); partly (12%); and not at all (2%). Two percent of borrowers said it was too soon to tell. 15 Given the increase in full-draw lump-sum payouts in recent years, we think these percentages are likely to change in the future. b. If borrowers have drawn all of their available funds, what financial resources do they use to meet new or unexpected expenses? Borrowers turn to savings, other assets, Social Security, or pension income to finance their needs in retirement. In the absence of other resources, many reverse mortgage borrowers end up defaulting on their reverse mortgage loans when they cannot pay their property taxes and/or homeowners insurance. This danger is of particular concern when borrowers tap their home equity at early ages and when they take out all reverse mortgage proceeds in a single lump-sum payment and exhaust their borrowing capacity at the onset of the loan. IV. The differences in market dynamics and business practices among the broker, correspondent, and retail channels: 10. c. How do these factors (compensation structures) affect the choices presented to consumers? Smaller lenders tend to offer fewer loan options. Therefore, if a consumer approaches a particular lender, he or she may not be offered every type of reverse mortgage loan that is available. Some lenders may be driven by the compensation offered for certain types of reverse mortgage loans. As noted in the CFPB s recent reverse mortgage report to 14 National Association of Realtors, Profile of Home Buyers and Sellers 2011, Washington, DC, November 2011, p Redfoot et al., p

8 Congress, lenders receive much higher compensation for fixed-rate loans sold in the secondary market than they receive for adjustable rate loans The Bureau has observed that major large bank originators of reverse mortgages tended to originate a far higher percentage of adjustable-rate, line-ofcredit or monthly-payout loans than the nonbank originators. What explains this difference? As stated question in10(c) above, it appears that reverse mortgage loan originators are influenced by the amount of profit that can be derived by selling loans in the secondary market. It is likely that this influences the array of products offered to consumers by a given lender. Nonbank originators who have lower loan origination volumes likely offer fewer loan products. In addition, lenders with lower volumes often cannot offer loans at prices that are competitive with the largest lenders. However, given the recent departures of the largest lenders from the reverse mortgage market, this may not be the case in the future. Conclusion AARP appreciates the opportunity to provide information on the reverse mortgage market. We look forward to working with you and your staff to develop effective policies to protect the financial security of reverse mortgage borrowers. Please contact Cristina Martin- Firvida at if you have any additional questions. Sincerely, David Certner Legislative Counsel and Legislative Policy Director Government Affairs 16 Reverse Mortgages Report to Congress, Consumer Financial Protection Bureau, Washington, DC, June 28, 2012, p.95. 8