Reverse Mortgages and Aggressive Marketing

Homeowners funded more than 130,000 reverse mortgages last year. Unfortunately, some of them were pressured into programs that didn't meet their expectations due to questionable advertising practices.

Bait-and-switch is the oldest sales trick in the book. So-called financial advisors are using the tactic to trick the elderly into high-fee reverse mortgages. While these homeowners think that they're realizing the dream of financial freedom, they're ending up with the nightmare of financial ruin.

Understanding reverse mortgages

The reverse mortgage is a loan product designed specifically for elderly homeowners. It's essentially a home equity loan that doesn't require repayment until the home is sold. The money from the loan can be paid to the borrower in one lump sum or through periodic payments. In certain situations, when structured appropriately, the reverse mortgage can provide necessary financial security to those whose only major asset is their home.

Aggressive sales tactics

Unfortunately, some reverse mortgage borrowers have been pushed by aggressive financial advisors into situations that they didn't fully understand. Reverse mortgages are complex loan products, and they're not for everyone. One problem is that upfront loan fees can be very high. The fast-talking advisor will be quick to say that the fees aren't paid out of pocket; they're just taken out of the first loan distribution. But those fees will accrue interest, just as they would on a regular loan. Since reverse mortgages don't require monthly repayments, all accrued interest charges are added into the loan balance over time. The fees, plus the interest on them, will be a significant expense.

Slick advisors may also push borrowers into lump-sum distributions, even when this isn't the best choice.

Independent counseling dilemma

It's a federal requirement that prospective reverse mortgage borrowers meet with an independent advisor prior to funding. In reality, many borrowers fulfill this requirement, but still remain unclear about the consequences of funding a reverse mortgage. Many of these counseling organizations receive funding from lenders, which also calls their independence into question.

Shady investment recommendations

Complaints have also surfaced about advisors making investment recommendations to prospective borrowers. In some situations, advisors have convinced their customers to funnel their lump sum funding into expensive annuity contracts. This is a dangerous proposition. Annuities are extremely complex, and it can be difficult for borrowers to determine what kind of value they'll receive for their investment. It wouldn't be uncommon for the annuity to build value more slowly than the rate at which interest accrues on the loan. That scenario ultimately lowers the borrower's financial status. Meanwhile, the advisor makes healthy commissions on the loan and on the annuity contract.

If you're considering a reverse mortgage, don't let a financial advisor bait you into something you don't understand. Talk to friends and family, and consult with independent sources, such as the AARP. The reverse mortgage might be the right solution, but it should never be coupled with a risky investment program.