NEW YORK The Financial Industry Regulatory Authority this month urged senior citizens to carefully weigh their options before using reverse mortgages to tap their home equity for additional retirement income.
The group, formed by a merger of the NASD and some regulatory functions of NYSE Group Inc., warned that a reverse mortgage an interest-bearing loan secured by the equity in a home can jeopardize their financial futures.
With a reverse mortgage, a bank makes payments to a homeowner instead of the homeowner making payments to a bank. The loan is repaid, with interest, when the borrower sells the house, moves out or dies. Reverse mortgages have high fees typically about 7 percent of the home's value and they make it difficult for homeowners to leave the property to their heirs.
The warning notes that, in some cases, those who sell the mortgages may profit from their sale, giving them twice the incentive to talk someone into a loan they may not need.
Finra Chief Executive Mary L. Schapiro said home equity "is often a homeowner's most valuable asset and most precious source of retirement security." Accordingly, the agency reminded homeowners that reverse mortgages should generally be a last resort.
Reverse mortgages were originally designed as a tool for aging, low-income homeowners to keep their homes, Finra said. But they have been used more often by retiring Americans as a way to finance a more extravagant retirement lifestyle than they could otherwise afford.
Still, as foreclosure rates continue to rise amid the subprime-mortgage crisis, some homeowners who have built up equity in their home may consider reverse mortgages their best option against losing it.
The warning continues Finra's push to keep investors from being hurt, and to get money back to those who have been.
The self-regulatory body has been asking brokerage firms for information about the marketing and sale of mortgage-related products, specifically those sold to individual investors. In December, Finra sent letters to several brokerage firms asking for documents and descriptions of how collateralized mortgage obligations were valued, according to a copy of the letter obtained by The Wall Street Journal.
And in late February, Finra said it settled cases that could return more than $25 million to mutual-fund investors who didn't receive charge waivers to which they were entitled.