Consumer protections on reverse mortgages sought
Editor’s note: This story first appeared in the April 12-18, 2018, issue of Caribbean Business.
A person identified only as “don Juan” by Puerto Rico’s Legal Services Office purchased a reverse mortgage with money used to care for his wife, who had Alzheimer’s disease. The investor, however, tried to foreclose on the residence, contending “don Juan” had failed to pay property taxes and purchase hazard insurance. “Don Juan” contacted the loan servicer, which was not a local bank, to clear up the misunderstanding but, because he did not speak English, he was told he would be called back, which did not occur. The loan servicer, instead, tried to foreclose on his home.
Through the Legal Services Office, he managed to prove he had insurance and was also exempted from paying property taxes. The case, however, is a classic example of problems with reverse mortgages in that these foreclosures often involve foreign bankers who do not know local laws. These loan services often do not provide advance warning to consumers before attempting to foreclose on a home, which is often done in federal court because it is faster but also more expensive for the homeowner.
Current regulations also do not provide for loss-mitigation alternatives once the loan is declared in default. To make matters worse, communications between the loan servicer and homeowner is deficient, the Legal Services Office said.
José Acarón, state director of AARP, said the island passed a law in 2011 to protect consumers who sought reverse mortgages, following deceptive advertising on radio and television. Some of these ads contained language referring to reverse mortgages as a federal program and not a mortgage loan. They also falsely led homeowners to believe they would be able to keep their homes and receive additional income from the product.
“While it is true the goal of the reverse loan is for people to keep their homes and acquire income, the contract also says the bank can foreclose on the home if the homeowner does not have hazard insurance or fails to keep the house in good shape,” he said.
Some banks have led consumers to believe the money they were receiving from the reverse mortgage came from the home’s equity instead of from debt that grows with every payment given to consumers, which also accumulates interest.
More often than not, the amount of money promised as part of the reverse mortgage is not enough for the consumer to live on. He noted that an AARP member from Carolina sought a reverse mortgage because she did not have enough income. Her house was valued at $132,000 but she only received a reverse mortgage for $57,000, of which $12,000 went toward closing fees. She received a lump sum because she needed to repair the house and pay some debts. However, the accumulated monthly interest on the loan turned out to be $327. “She told us she was not adequately informed of the costs and, while she did not tell us how much money she had left, at age 72, she fears she will end up in the same needy condition she was before she got the loan,” he said.