Texas became the state with the second-most reverse mortgages last year, just as the financial tool for senior citizens comes under greater scrutiny by consumer advocates across the nation.
In December, Consumers Union and two California-based senior advocacy groups released a report detailing aggressive marketing tactics; misleading advertising; promotion of other products like annuities and long-term-care insurance; weak counseling; and the loans' unsuitability for some seniors.
"Reverse mortgages are a very risky deal for borrowers who don't understand the complicated terms of the loan and how quickly fees and interest charges can add up," said Norma Garcia, senior staff attorney for Consumers Union, publisher of Consumer Reports. "Reverse mortgages should only be a last resort for seniors who want to stay in their homes and have no other alternatives to supplement their income."
Available in Texas for a decade, a reverse mortgage is a loan against the equity built up in the home of a person 62 or older. They are so named because instead of the homeowner making monthly payments to the lender, the lender makes payments to the homeowner against the future sale of the home.
Texans have taken out 37,257 reverse mortgages with a value of $5.3 billion. Nationally, more than 450,000 reverse mortgages with a value of $117 billion have been taken out by seniors in the past five years.
"Nationally, these loans have exploded in the past few years," Garcia said. "Many seniors have paid a mortgage or several mortgages in their lifetime, but this is a very different product. We caution people to take extra steps, meet with counselors and other professionals to determine if this is best product for you."
The warnings come as popular actors like Henry Winkler, James Garner and Lee Majors appear in advertisements supporting reverse mortgages.
Seminars with free meals for seniors are used to sell them.
The complaints outlined in the Consumers Union report haven't translated to formal complaints to the Texas Department of Savings and Mortgage Lending, which oversees reverse mortgages in the state, according to department spokesman Chris Schneider.
"We've had a few inquiries, but no official complaints," Schneider said.
Nor has the department seen evidence of improper sales tactics in on-site visits or reviews of mortgage brokers' records, Schneider said.
"If the public has a concern, they can check with us to make sure the broker is licensed and legitimate," Schneider said. Consumers can do so at www.sml.state.tx.us; click on "Search for a RMLO Licensee" and type in the broker's name.
Consumers also can file a complaint with the department, and it will be investigated, Schneider added.
Garcia said the reverse mortgage marketplace is seeing trouble in other parts of the country, which could show up in Texas soon.
Her study points to numerous studies and warnings by advocates and government entities.
A 2009 study by the Government Accountability Office found that 26 entities made potentially misleading claims in marketing materials, although few were from the top 12 reverse mortgage lenders in the country.
The GAO described the claims as "inaccurate, incomplete" or employing "questionable sales tactics."
The study also found that counseling for seniors, which the Housing and Urban Development Department requires before they take out a reverse mortgage, lacked guidelines. HUD developed those guidelines last year; they include a 10-question interview to make sure seniors that can meet their expenses under the new mortgage arrangement.
HUD also requires that homeowners with income below the federal poverty level be told to use BenefitsCheckup.org. That site identifies other sources of public benefits and government assistance available in conjunction with a reverse mortgage.
Ninety percent of HUD-required counseling for reverse mortgage applicants is done by phone, but Garcia recommends face-to-face meetings with a counselor before signing up for the loan. In addition, she suggests discussing a reverse mortgage with a certified financial planner or other third-party adviser.
Consumers Union's report also included findings of an AARP study on cross-selling reverse mortgages with deferred annuities and long-term care insurance, which AARP does not endorse. The report also included warnings and reports from the FBI, HUD's inspector general and state attorneys general that some companies sell reverse mortgages by preying on the elderly.
But the most alarming part of the report points out similarities to the subprime mortgage market, the earliest casualty of the housing bust.
According to John Dugan, former comptroller of the currency for the Treasury Department, those include "a vulnerable customer class; complex product features that can be difficult to explain and can be susceptible to deceptive marketing; nontraditional, asset-based underwriting; and the potential for skewed incentives for key distributors of the product."
Peter Bell, president of the National Reverse Mortgage Lenders Association, said the Federal Reserve recently created new rules to address some of these issues, but the rules were shelved last week because oversight of reverse mortgages now falls under the fledgling Consumer Financial Protection Bureau.
New rules could be as long as a year or two away, he said. In the meantime, Bell said, the industry is "proactive in creating an environment of trust for the consumer."
"These criticisms deal with a handful of cases," he said.
To see the study, go to www.consumersunion.org and search for "today's reverse mortgages."
Teresa McUsic's column appears Fridays.