Federal Agency Issues Warning on Reverse Mortgages

by Pam Martens and Russ Martens , wallstreetonparade:

The Consumer Financial Protection Bureau (CFPB), the Federal agency created after the 2008 financial crash to protect consumers from predator banks, has issued a warning on what smells like the latest financial blood sport: bank employees selling reverse mortgages to seniors under the guise that it will allow them to reap a larger Social Security benefit down the road by delaying Social Security payments to a later age.

Reading through the CFPB report that accompanied the warning, it reminded us of how the tobacco industry had secretly targeted young people as “replacement smokers” while intentionally hiding the deadly effects of smoking from the public.

The CFPB report advises that “nearly five million homeowners will turn age 62 by 2020.” That’s the earliest age at which one can collect Social Security retirement benefits as well as the earliest age to apply for a reverse mortgage. That creates a big pool of potential new customers to whom banks can peddle reverse mortgages.

The problems with this marketing strategy are multiple explains the report:

“The CFPB examined different scenarios and found that, in general, the reverse mortgage loan costs exceed the cumulative increase in Social Security that homeowners would receive in their lifetime by delaying Social Security benefits. Furthermore, using this strategy will likely diminish the amount of home equity available to borrowers later in life. As a result of the diminished equity, borrowers that seek to sell their homes after using this strategy may have limited options for moving to a new location or handling a financial shock.”

It’s understandable why financial predators would want to tap into the home equity in the homes of seniors. According to the CFPB report, it’s where the largest single pool of wealth resides for people 65 and older. As of 2015, according to the report, “80 percent of consumers 65 and older owned their homes– 30 percent of them with a mortgage and 70 percent without.”

The report explains how the reverse mortgage works:

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