Financial professionals often recommend a reverse mortgage loan as a way to delay claiming Social Security benefits. A reverse mortgage, federally insured through the Federal Housing Association’s (“FHA”) Home Equity Conversion Mortgage Program (“HECM”), allows homeowners age 62 and older to borrow against the equity in their homes and defer payment of the loan until they pass away, sell, or move out. The borrower may receive the loan proceeds in one of three ways: as a lump-sum payment, in monthly payments, or as a line of credit. With this strategy, a homeowner uses the income from a reverse mortgage to replace the income otherwise received in Social Security benefits in the years between the minimum benefits age (62 years) and full benefits age (67 years), or later. When Social Security benefits are delayed, individuals receive a permanent increase in monthly benefits, which results in an increased cumulative lifetime benefit.
On August 24, the Consumer Financial Protection Bureau issued a report alerting older consumers that this strategy may not actually save them money because the costs of the reverse mortgage, in many cases, exceed the lifetime benefits of increased monthly Social Security income realized from delaying benefits until age 67 or later. The CFPB also warned older consumers that they risk losing equity in their homes that they may need to meet expenses later in life. The report advises older consumers of these risks and is accompanied by a new consumer guide and video to help older consumers and their families understand the risks, benefits, and requirements of a reverse mortgage so that they can make an informed decision before choosing this path.
Specifically, in the report, the CFPB compared the increased lifetime benefits that a homeowner will receive by delaying the age of Social Security benefits with the average cost of a reverse mortgage. Using age 62 and a seven-year loan period, the average length of a reverse mortgage loan, the CFPB determined that reverse mortgage loan costs will exceed the lifetime amount of money gained from an increased Social Security benefit if the consumer lives to age 85. The longer the consumer lives, the more the loan cost exceeds the cumulative social security benefits. In addition, the CFPB found that a reverse mortgage reduces the equity that homeowners have available to use or pass on to their heirs because the loan balance is likely to grow faster than home values.
While the CFPB’s report does not suggest that it will take steps to implement any new rules or regulations governing reverse mortgages, it highlights mounting concern with the HECM loan product generally. This report piggybacks another report issued by the CFPB two years ago, addressing consumer complaints and frustration with reverse mortgages, as well as a growing trend by plaintiffs’ attorneys to file lawsuits against reverse mortgage lenders and servicers for alleged improprieties in loan servicing. The discussion surrounding reverse mortgages is far from over.
The report can be found here.