Reverse mortgages may sound risk free, but failure rate is high

Extra cash. Steady income no matter how long you live. No need to repay.

Both explicitly and implicitly, reverse-mortgage pitches often make the equity-tapping loans sound like a risk-free answer for borrowers facing a shortfall in retirement income. But they have a failure rate of about 10 percent, far beyond those of conventional mortgages. That's one reason the Consumer Financial Protection Bureau moved Thursday to advance its campaign aimed at ensuring that homeowners understand their risks, as well as their benefits.

Reverse mortgages were first in the new agency's focus three years ago when it issued a report to Congress on the growing market niche and, later in 2012, warned lenders and brokers about deceptive pitches, including some suggesting that borrowers wouldn't owe any payments even though they could default if they missed covering taxes, insurance, or maintenance.

In February, the agency accused a Maryland company, All Financial Services L.L.C., of deceptively implying it was connected to the federal government - including one mailer to nearly 200,000 homeowners in Pennsylvania, New Jersey, and elsewhere adorned with "an eagle resembling the Great Seal of the United States."

On Thursday, the agency released findings from a focus-group study of 97 recent pitches - direct mailings as well as TV, print, radio, and online ads - conducted to weigh how well consumers understand the messages and recognize what's omitted or purposely downplayed.

Dozens of homeowners 62 or older - reverse mortgages' target market - viewed the ads for the study. Many were left with basic misimpressions about how the loans work, Richard Cordray, the agency's director, told reporters during a conference call.

Stricter oversight of reverse mortgages and other products aimed at older consumers was among Congress' priorities when it established the CFPB as part of 2010's Dodd-Frank financial reforms. The agency says about 628,000 such loans are currently outstanding, but Cordray said that number would likely grow as the rest of the Baby Boomers reach retirement age. About 10,000 Americans turn 65 each day, he said.

Cordray said some focus-group members "found it difficult to understand from the ads that reverse mortgages are loans with fees and compounding interest.

"Most ads did not include interest rate information or included it only in the fine print," he said. "Other consumers mistakenly thought that because the money they received through a reverse mortgage represented home equity they had accrued over time, there was no reason they would have to pay it back."

References to a government role also misled some consumers, leaving them "with false impressions about reverse mortgages being a risk-free government benefit rather than a loan," Cordray said.

Even with their risks, reverse mortgages may make sense for some consumers. The key is understanding what you're getting into, and whether there are better alternatives.

Like ordinary mortgages, reverse mortgages come with a variety of terms. Consumer Reports says fixed-rate versions, whose use soared when interest rates fell after the financial crisis, typically require borrowers to borrow the full loan limit right away, extending the years on which they'll accrue interest. Adjustable-rate versions allow borrowers to draw on equity only when needed.

What are other alternatives?

The CFPB, in its advice to consumers (http://1.usa.gov/1ANeZmQ) suggests other strategies, including the obvious ones of waiting until you truly need the money, cutting expenses, or drawing on equity through a conventional refinance or home-equity loan. Downsizing is also an option worth considering.

If you're still interested in a reverse mortgage, the consumer agency suggests loans that allow you to draw money only as needed, to avoid paying unnecessary interest.

"The less you take out up front, the more you will be able to borrow later," the CFPB says. "As long as you continue to meet the requirements of your reverse mortgage, your credit line cannot be frozen or canceled."

Its key advice is to consult a HUD-qualified counselor (http://go.usa.gov/v2H or (800-569-4287). A reverse mortgage may seem like a godsend, but it's really just another kind of loan - with all the risks any credit entails.

215-854-2776@jeffgelles

www.philly.com/consumer