Reverse Mortgages Worry Regulator | Top iPad Finance Apps

By MAYA JACKSON RANDALL

WASHINGTON?A U.S. financial regulator warned that new rules may be needed to address hidden dangers in reverse mortgages, the special loans that enable cash-strapped seniors to borrow against the equity in their homes.

Deceptive marketing practices, complicated loan terms and misleading marketing materials are some of the problems the Consumer Financial Protection Bureau highlighted in the $ 90 billion industry, which is expected to grow in popularity as tens of millions of baby-boomer homeowners grow older and struggle to pay for retirement.

Any new regulations would affect industry leaders such as Quicken Loans and Wall Street financial firms like Guggenheim Partners and Knight Capital Group Inc.,

which own companies that make reverse mortgages. Large banks such as Bank of America Corp. and Wells Fargo & Co. have left the market amid rising defaults and declining home prices.

Nearly 10% of reverse-mortgage borrowers are at risk of foreclosure because they have failed to pay taxes and insurance, according to the CFPB?s study, mandated by the 2010 Dodd-Frank financial overhaul.

Reverse mortgages, targeted at homeowners over 61 years old, are similar to home-equity lines of credit. But instead of a monthly payment, repayment is deferred until the homeowner leaves the home, dies or fails to maintain the property, pay homeowners? insurance or property taxes.

The upfront fees, interest and closing costs can be much higher than on home-equity loans. While there are no required monthly payments on a reverse mortgage, the interest is added to the loan balance each month, and so the rising loan balance can grow to exceed the value of the home.

The loans represent a small corner of the national mortgage market, with only about 2% to 3% of eligible households using them, according to the CFPB. But studies show demand is growing, expanding the pool of 580,000 currently outstanding, according to Reverse Market Insight, a data provider and newsletter on the industry.

Peter Bell, head of the National Reverse Mortgage Lenders Association, said better consumer education is necessary, and he shares concerns about misleading advertising and scams, adding that most consumers who have the loans are satisfied.

Seventy percent of borrowers are taking out the proceeds as a lump sum, as opposed to a line of credit or stream of payments, according to the bureau?s study. Such a move could result in borrowers having trouble paying taxes and insurance on their homes, which could put them at risk of default.

Monica Newton, a 68-year-old resident of Chireno, Texas, said she has had troubles with unexpected bank fees and charges on her reverse mortgage, but she said in general the product is ?really good for old folks? who aren?t concerned about leaving their homes to their kids or other family members.

Ms. Newton used cash to purchase her home for about $ 140,000 and decided to take out a reverse mortgage about five years ago when she needed extra money to cover retirement expenses. She said she is worried about being able to keep her house maintained to her lender?s standards.

Write to Maya Jackson Randall at Maya.Jackson-Randall@dowjones.com

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