after all reverse mortgage Growth will explode. Baby boomers are reaching retirement age, and for most, home ownership is the biggest part of their nest egg. Reverse mortgages will be the tools that many of these retirees will use to unlock that nest egg for retirement living expenses. The number of new HUD Home Equity Conversion Mortgages (HECM) already increased by more than percent in the first nine months of 2006 compared to the same period a year ago.
But along with the growth of reverse home mortgages, the opportunities for fraud and scams are increasing. Reverse mortgages differ from traditional mortgages in ways that make them attractive vehicles for scammers:
- Reverse mortgages are products designed specifically for and targeted at seniors, the demographic most vulnerable to fraud;
- Scammers know that reverse mortgages offer the elderly homeowner relatively easy access to a sizable pool of cash; and,
- Reverse mortgages are harder to understand than traditional mortgages, making it easier for the scammer to confuse and take advantage of victims.
In this article, we look at some of the tactics scammers use and the precautions reverse mortgagors can take to protect themselves.
Scam Tactic One – Downplaying the Credit Advice
An educated borrower is the scammer’s worst enemy – but it is up to the borrower to educate themselves and take advantage of counseling and other opportunities to learn more about reverse mortgages.
All three major reverse mortgage programs — HUD HECM, Fannie Mae’s Home Keeper, and Financial Freedom — require prospective borrowers to seek advice from an independent advisor specially trained in reverse mortgages before borrowing.
In a recent Detroit-area scam, a corrupt lender managed to keep the borrower in the dark about the amount she could borrow. She thought her loan would be $61,000 when she actually borrowed $103,000. Guess who pocketed the $42,000 difference? A thorough counseling session would have given the homeowner an accurate idea of the actual amount she was entitled to. Unfortunately for the victim, when this never happened, the prosecutor says:
“A consultation explaining the reverse mortgage process was required by Financial Freedom before the loan could be processed. Mr James allegedly told Ms Schultz he could skip the counseling session by just asking a few questions over the phone.”
Caution: Although telephone counseling is permitted, it is always best to meet with the counselor in person. If you find someone you are working with in this process suggesting that a consultation can be done quickly over the phone or otherwise downplaying the importance of pre-loan consultation, be extremely suspicious.
Cheating Tactic Two – Fake
Fake is an important part of many scams. In the Detroit case cited above, the lender required the title company to write two checks payable to the homeowner: one for $61,000, which the homeowner received, and a second for $42,000, which the corrupt lender signed with a forged signature confirmed and paid into his own account.
In one California case, two scammers — one a financial advisor, the other a handyman — persuaded an elderly homeowner to take out a reverse mortgage to pay for home repairs. The financial advisor opened an account for the loan proceeds and forged the victim’s name to gain access to funds.
Another Californian case reported in the Santa Cruz Guardian shows how dangerous it can be to sign “unfinished” documents:
Mrs. Sally Scott is 66 years old. While she’s getting Social Security and pension checks, she’s still struggling to make ends meet. She saw an ad for a “reverse” mortgage — a loan that allows seniors 62 and older to get cash by borrowing against their home and that doesn’t have to be repaid as long as they live there. In search of a small financial cushion, she spoke to a mortgage broker about a $10,000 reverse mortgage.
When she received the loan documents, she found that the loan amount was $200,000. The agent promised he would change the number but insisted that she sign the paperwork first. Mrs. Scott trusted the agent and signed.
A week later, she received a check for $200,000. She immediately notified the agent who apologized for the mistake and instructed her to return the money. It turned out that the account Mrs. Scott had put the money back into belonged to the agent. He disappeared, leaving her with a mortgage in arrears and no way to repay the loan.
Caution: Never sign documents with gaps to fill in or subsequent corrections. Carefully protect access to your checking and other accounts. Check and reconcile checking account and loan statements regularly. If you find anything wrong, contact your financial institution immediately.
In the Detroit case cited above, the victim became aware of the fraud when she received a loan statement stating that the balance of her reverse mortgage (including interest) totaled $131,000.
Also, take advantage of the free credit reports available to you under federal law. Annual review of your credit report is also a great way to uncover unauthorized financial activity under your name.
Scam Tactic Three – Charging for free reverse mortgage information
The complexity of reverse mortgages means it’s natural for borrowers to seek support and advice to help them understand the loan process, find a lender, or generally better understand what they’re getting into. Some scammers have taken advantage of this to offer reverse mortgage information and services for a fee, which is available to consumers free of charge.
For example, some elderly homeowners have been contacted by companies who have offered to help them find a reverse mortgage lender in exchange for a percentage of the loan. This type of arrangement should always be avoided. According to the HUD website:
HUD DOES NOT recommend using an estate planning service or a service that charges a fee just for referring a borrower to a lender! HUD provides this information free of charge, and HUD-approved housing counseling agencies are available at no or minimal cost to provide information, advice, and free referrals to a list of HUD-approved lenders. Call toll-free at 1-800-569-4287 for the name and location of a HUD-approved housing counseling agency in your area.
Caution: Walk away from anyone who offers to find a reverse mortgage lender for a fee. Use the Internet to find free information about reverse mortgages, or read one of the many excellent books that have been published over the years.
If you feel you need a professional financial planner to evaluate your overall situation – including the reverse mortgage decision – find a certified financial planner (CFP) who works on a fee basis and is knowledgeable about reverse mortgages (many are Not). t).
Scam Tactic 4 – Impersonating a government or non-profit official
The most popular form of reverse mortgage — the Home Equity Conversion Mortgage (HECM) — is an official program of the US Department of Housing and Urban Development (HUD). However, neither the HECM program nor any other reverse mortgage program is marketed directly to elderly homeowners by government employees.
Unscrupulous reverse mortgage sellers have been known to pose as government officials or non-profit volunteers to older homeowners.
Caution: Make sure you know who you are dealing with and what organization they represent. Don’t be afraid to ask for information like home office location and phone number. Use resources like HUD and the National Reverse Mortgage Lenders Association (NRMLA) to look into the company.
Scam Tactic 5 – Bundling things up with reverse mortgage financing
Smart consumers know that the best way to buy a car is to separate the parts of the transaction—purchase, financing, and trade-in. With a bundled transaction, it is easy for the consumer to get confused and not understand the true cost of the overall deal. What appears to be a “great price” for the car may hide excessive financing costs or a low trade-in value.
Similarly, a common tactic used by scammers is to bundle reverse mortgage financing with something else, e.g.
In one Seattle-area case, older consumers were told that living trusts must be purchased in order to obtain a reverse mortgage. In another case, seniors were encouraged to take out a reverse mortgage and use the proceeds to “invest” in billboards on trucks.
Often two or more scammers work as a team. For example, in the California case cited earlier, an unscrupulous financial advisor steered the homeowner to a home repair company that was involved in the fraud and grossly overcharged the victim for repair work.
If you are dealing with someone trying to bundle a reverse mortgage with another product or service, or directing you to a specific contractor/lender, be extremely suspicious. If you feel uncomfortable or that the person is using high-pressure sales tactics, walk away.
Caution: When home improvement or estate planning services are needed, shop for the best deal. It’s best if you find what you’re looking for rather than them finding you. Homeowners should avoid doing business with anyone who comes to the door uninvited, makes an unwanted call, or whose name happens to be found on a flyer.
Once you’ve found the best deal, consider your financing options—including a reverse mortgage. By making these decisions separately, you protect yourself from possible fraud and help you get the most from your money.