It’s no surprise to most of us when we see misleading claims about mortgages in advertisements- but how about misleading claims on the FHA’s own website?
I’ve complained in previous posts that reverse mortgages are not the risk-free products that their marketers often claim. It’s bad enough to have lenders make misleading claims. When the FHA does it though, it’s inexcusable. Here’s one example:
Reverse mortgages are becoming extremely popular for America’s seniors. FHA’s reverse mortgage is a federally-insured private loan, and it’s a safe plan that can give older Americans greater financial security. Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements, and more.
There are a couple of problems with this claim. One, as a recent Government Accounting Office report indicates, HECMs [Home Equity Conversion Mortgages] are not without their risks. The other is the claim of greater financial security. This is a LOAN for Pete’s sake. Since when does borrowing money make for greater financial security?
So that doesn’t seem that misleading to you? Let’s look at some of the other claims on the FHA website then. How about this one?
The Home Equity Conversion Mortgage program (HECM) enables homeowners who are 62 years of age and older to withdraw some of the equity in their home in the form of:
Monthly payments for life or a fixed term;
A lump sum; or
A line of credit.
The GAO report identified eight claims about HECMs that it considered "inaccurate, incomplete or questionable". Number six says in part:
[A]ny implication that the HECM is not a loan.
Nothing in the FHA’s above definition of an HECM indicates that it is in fact a loan. To refer to it as a "withdrawal of equity" is to imply that it is comparable to withdrawing funds from a savings account instead of calling it what it actually is- a secured loan.
Number five on the list of questionable claims was in part:
The borrower can access lifetime income…
Isn’t that what the above appears to imply?
The Home Equity Conversion Mortgage Program can enable an older home-owning family to stay in their home while using some of its built up equity. The program allows such a household to get an insured reverse mortgage–a mortgage that converts equity into income.
To say that a HECM converts equity into income certainly implies that it is not a loan. Loans are "liabilities", not "income". That referring to HECMs as "income" is inappropriate was reiterated by a GAO official:
In one example, a reverse mortgage promised "lifetime income," even though HECMs don’t provide income and permit borrowers to receive equity payments only while they live in the homes, said Mathew Scire, the director of financial markets and community investment at the Government Accountability Office.
The very term "Home Equity Conversion Mortgage" seems designed to mislead. It reemphasizes the claim that somehow borrowers are converting their equity into cash rather than the reality that this is a secured loan with a balance that increases every month.
It is true that the FHA’s website does indicate that a HECM is a loan- that information is not completely lacking. Nevertheless, as the GAO indicated in their report, these are relatively complex loans. By having claims such as "converts equity into income" the website is at best confusing on this issue.
It is concerning that the website touts these products as "safe" without describing any of the risks involved. Potential borrowers might not feel it necessary to look beyond this endorsement. While the FHA does require counseling for borrowers, the GAO report indicated that counseling guidelines were not being followed. Additionally, the website states the following:
FHA does not recommend using an estate planning service, or any service that charges a fee simply for referring a borrower to a lender.
When you read the above in context on the page, you can see that the intent is to warn potential borrowers of scammers who charge a fee for a referral to an FHA lender. However, it might also appear to some people that the FHA does not recommend using an estate planning service at all. A little encouragement to seek independent financial advice or legal counsel might not be amiss.
It is also concerning that the FHA website is clearly promoting reverse mortgages. This, in spite of the fact that there are potential risks and reasons that a reverse mortgage may not be appropriate for some borrowers. It should be the duty of the FHA to provide potential borrowers with objective and balanced information. Their website should be a balanced resource- not a marketing tool.
By failing to provide clear and objective information on their website, the FHA is not only putting potential borrowers at risk, but the American taxpayer as well:
[D]isturbing is the prospect that upon loan termination, thousands of reverse-mortgage loans will end up exceeding the values of the properties, because of declining home values. This leaves the FHA insurance fund on the hook to make up the difference.
The GAO report recommends:
[T]hat the Secretary of the Department of Housing and Urban Development; Chairman of the Federal Trade Commission; Chairman of the Federal Deposit Insurance Corporation; Chairman of the Board of Governors of the Federal Reserve System; Comptroller of the Currency, Office of the Comptroller of the Currency; and Director of the Office of Thrift Supervision, take steps, as appropriate, to strengthen oversight and enhance industry and consumer awareness of the types of marketing claims that we discuss in this report.
I recommend that the government can start this process by cleaning up the FHA website.