By all accounts, reverse home mortgage growth is about to explode. Baby boomers are nearing retirement, and for most, home equity makes up the bulk of their savings. Reverse mortgages will be the tools that many of these retirees will use to take advantage of these savings for retirement living expenses. The number of new HUD Home Equity Conversion Mortgages (HECMs) has already increased by more than one percent in the first nine months of 2006 from the same period a year ago.
But along with the growth of reverse home mortgages comes increased opportunities for fraud and scams. Reverse mortgages are different from traditional mortgages in ways that make them attractive vehicles for scammers:
- reverse mortgages are products specifically designed and aimed at the elderly, the population group most vulnerable to fraud;
- Scammers know that reverse mortgages give older homeowners relatively easy access to a considerable amount of cash; and,
- Reverse mortgages are more difficult 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 mortgage borrowers can take to protect themselves.
Scam Tactic One: Minimizing Pre-Loan Counseling
An educated borrower is a scammer’s worst enemy, but it is up to the borrower to educate themselves and take advantage of counseling and other opportunities to learn about reverse mortgages.
All three major reverse mortgage programs (HUD’s HECM, Fannie Mae’s Home Keeper, and Financial Freedom) require that potential borrowers receive advice from a specially trained independent reverse mortgage counselor before obtaining a loan.
In a recent fraud case in the Detroit area, a crooked lender was able to keep the borrower in the dark about the amount she could borrow. She thought her loan would be $61,000 when she was actually borrowing $103,000. Guess who pocketed the $42,000 difference? A thorough counseling session would have given the owner an accurate idea of the actual amount to which he was entitled. Unfortunately for the victim, the prosecutor in the case says this never happened:
“Financial Freedom required a counseling meeting explaining the reverse mortgage process before the loan could be processed. Mr. James reportedly informed Ms. Schultz that she could waive the counseling meeting just by asking a few questions for phone”.
Caution: Although counseling over the phone is allowed, it is always best to meet face to face with the counselor. If you find someone you’re working with through the process suggesting that counseling can be done quickly over the phone or downplaying the importance of pre-loan counseling, be very suspicious.
Scam Tactic Two: Forgery
Counterfeiting is a key part of many scams. In the Detroit case cited above, the lender asked the title company to prepare two checks in the owner’s name: one for $61,000 that the owner received, and another for $42,000 that the corrupt lender endorsed with a forged signature and deposited in his own account. .
In a California case, two con artists, one working as a financial advisor and the other as a handyman, convinced an elderly homeowner to take out a reverse mortgage to pay for home repairs. The financial adviser opened an account for the loan proceeds and falsified the victim’s name to gain access to the funds.
Another California case reported in the Santa Cruz Sentinel shows how dangerous it can be to sign “unfinished” documents:
Lady. Sally Scott is 66 years old. Although she receives Social Security and pension checks, she still can’t make ends meet. She saw an ad for a “reverse” mortgage, a loan that allows people 62 and older to receive cash by borrowing against their home and requires no repayment as long as they live there. Looking for a little financial cushion, she talked to a mortgage broker about a $10,000 reverse mortgage.
When you received the loan papers, you noted that the loan amount was $200,000. The broker promised that he would change the figure, but insisted that she sign the paperwork first. Trusting the broker, Mrs. Scott signed.
A week later, he received a check for $200,000. He immediately notified the broker, who apologized for the mistake and instructed him to refund his money. As it turned out, the account that Mrs. Scott returned the money to the broker. He disappeared, leaving her with a delinquent mortgage and no way to repay the loan.
Caution: Never sign documents with blank spaces to fill in or corrections to make later. Carefully protect access to your checking and other accounts. Review and reconcile checking account and loan statements regularly. If you find something wrong, contact your financial institution immediately.
In the Detroit case cited above, the victim became aware of the scam when she received a loan statement indicating her reverse mortgage balance (including interest) was $131,000.
Also, take advantage of the free credit reports available to you under federal law. Reviewing your credit report each year is also a good way to detect unauthorized financial activity in your name.
Scam Tactic Three: Charging for Free Reverse Mortgage Information
The complexity of reverse mortgages means that it is natural for borrowers to seek assistance and guidance to help them understand the loan process, find a lender, or generally better understand what they are getting into. Some scammers have taken advantage of this to offer, for a fee, reverse mortgage information and services that are available to consumers at no charge.
For example, some companies have contacted senior homeowners to offer help finding 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 any 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 free of charge or at minimal cost to provide free information, advice, and referral to a list of HUD-approved lenders. Call 1-800-569-4287, toll-free, for the name and location of a HUD-approved housing counseling agency near you.
Caution: Stay away from anyone who offers to find a reverse mortgage lender for a fee. Use the Internet to find free information on reverse mortgages, or read one of the many excellent books that have been published in recent years.
If you feel you need a professional financial planner to assess your overall situation, including your reverse mortgage decision, look for a fee-based Certified Financial Planner (CFP) who is knowledgeable about reverse mortgages (many they are not). ).
Scam Tactic 4: Impersonating a Government or Nonprofit Representative
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). in English). However, neither the HECM program nor other reverse mortgage programs are marketed directly to senior homeowners by government employees.
Unscrupulous reverse mortgage sellers have been known to represent themselves to elderly homeowners as government representatives or volunteers for non-profit organizations.
Caution: Make sure you know who you are dealing with and what organization you represent. Don’t be embarrassed to ask for information like the location of your home office and phone number. Use resources like HUD and the National Reverse Mortgage Lenders Association (NRMLA) to learn about the company.
Scam Tactic Five: Bundling Things With Reverse Mortgage Financing
Savvy consumers know that the best way to buy a car is to separate the parts of the transaction (purchase, financing and trade-in) from each other. With a bundled transaction, it’s easy for the consumer to become confused and not understand the true cost of the overall deal. What appears to be a “great price” for the car may mask exorbitant finance charges or low trade-in value.
Similarly, a common scammer tactic is to bundle reverse mortgage financing with something else, such as home improvements, annuities, risky investments, living trusts, or other estate planning products.
In one Seattle-area case, older consumers were told that living trusts must be purchased to obtain a reverse mortgage. In another case, seniors were encouraged to take out a reverse mortgage and use the proceeds to “invest” in truck-mounted billboards.
Frequently, two or more scammers work as a team. For example, in the California case cited above, an unscrupulous financial adviser directed the homeowner to a home repair contractor who was part of the scam and who overcharged the victim for the repair work.
If you find yourself dealing with someone who tries to bundle a reverse mortgage with another product or service or directs you to a particular contractor/lender, be very suspicious. If you feel uncomfortable or if the person is using high-pressure sales tactics, walk away.
Caution: When home improvement or estate planning services are needed, shop around for the best deal. It is better that you find what you are looking for instead of them finding you. Homeowners should avoid doing business with anyone who comes to the door uninvited, makes an unsolicited phone call, or whose name is randomly found on a flyer.
Once you’ve found the best deal, consider your financing options, including a reverse mortgage. Keeping these decisions separate will protect you from potential fraud and help ensure you get the most for your money.
