Document Type

Article

Publication Date

3-2014

Abstract

This article analyzes the factors that affect the effectiveness of the current rules and counseling protocol in enabling seniors to make well-informed decisions on whether to enter into a proposed reverse mortgage in light of the cognitive barriers that consumers in general, and seniors in particular, face. The article then proposes further changes to these rules and the counseling protocol to better enable seniors to determine whether entering into reverse mortgages is in their best interest in light of their specific financial situations and goals. Section I provides an overview of the current status of the law relating to reverse mortgages and their basic features, including the most current rules relating to the counseling requirement. Section I also summarizes the advantages and disadvantages of entering into a reverse mortgage, notes some of the other lower cost options, and presents a picture of the characteristics of an appropriate candidate for a reverse mortgage. Section II provides an analysis of the cognitive barriers that consumers in general, and seniors in particular, face when considering a reverse mortgage. As detailed in Section II, there are numerous cognitive processes that seniors need to go through to evaluate a reverse mortgage: (1) learning about and understanding how reverse mortgages operate; (2) estimating quantitative values such as the money they need, when they will need it, and the ongoing expenses of insurance, real estate taxes, and repairs; (3) evaluating attributes of reverse mortgages, such as the money they will obtain and the costs for obtaining this money;(4) identifying which attributes of reverse mortgages are important; (5) judging the likelihood of events, such as the likelihood that the senior will be involuntarily away from the home for more than twelve months; and (6)integrating that information to make a decision. Section II explains the psychological phenomena that make it difficult for anyone, especially seniors in many cases, to perform these cognitive processes and provides recommendations to mortgage counselors to best address these phenomena. Finally, Section III details law reforms that the authors propose to address gaps in existing legal protections identified in this article, including, in particular, modifying the 2010 mortgage counseling protocol to require mortgage counselors to make a finding based on certain specified criteria we detail as to whether the proposed reverse mortgage loan is likely to best meet the senior's needs and goals (the "suitability finding") and related reforms.