Election information: Proposition 5
Editor's Note: The Advocate is offering information about the upcoming constitutional amendment election Nov. 5. This feature, provided by the League of Women Voters, will look at the pros and cons of each of the nine amendments on the ballot. This is a look at Proposition 5.
Official ballot language
The constitutional amendment to authorize the making of a reverse mortgage loan for the purchase of homestead property and to amend lender disclosures and other requirements in connection with a reverse mortgage loan.
A "reverse mortgage for purchase" allows a senior aged 62 or older to purchase a new principal residence and obtain a reverse mortgage within a single transaction. Texas is the second largest market in the country for reverse mortgages but the only state that does not offer the "reverse mortgage for purchase" because it is not authorized in the state constitution.
A reverse mortgage is a form of home equity loan that does not require a monthly payment. During the course of the loan, the debt increases with the addition of various costs such as interest, mortgage insurance premiums and servicing fees, while the homeowner's equity decreases. Repayment of the loan is deferred until the borrower dies, sells or moves out of the residence.
While reverse mortgages are a small market nationally, approximately 70,000 originated per year, it could grow dramatically in the decades ahead spurred by an aging baby boomer population.
Proposition 5 would enable Texas seniors to use "reverse mortgages for purchase" to acquire a new residence. It would also require reverse mortgage lenders to expand currently required counseling to borrowers to include disclosure of the specific behaviors that can lead to foreclosure on a property.
• This proposition saves costs for seniors by allowing a reverse mortgage loan to be set up as part of a purchase rather than after a purchase to eliminate duplicative processes.
• Using a "reverse mortgage for purchase," the homeowner can occupy a new residence without making a single mortgage payment. This helps seniors relocate to other geographical areas or downsize to homes that better meet their needs.
• Reverse mortgage loans are typically easier to qualify for than traditional loans, which have income and credit score requirements to support the borrower's ability to meet repayment commitments.
• All reverse mortgages are complex financial products. Surveys have found that consumers struggle to understand and make good decisions even after required counseling.
• Homeowners can lose a lifetime of home equity as a result of fraud, scams, misleading advertising, aggressive sales tactics and discriminatory practices sometimes associated with reverse mortgages. This risk increases significantly when state regulation and enforcement are weak.
• As baby boomers consider the reverse mortgage market, their choices may put them at considerable risk at a time in their lives when making a financial recovery is unlikely.