By all accounts, reverse home mortgage growth is set to explode. Baby boomers are reaching retirement and, for most, home equity makes up the largest part of their nest egg. Reverse mortgages will be the tools that many of these retirees will use to tap into this nest egg for retirement living expenses. The number of new HUD Home Equity Conversion Mortgages (HECM) already has increased more than percent in the first nine months of 2006 over the same period one year ago.
But along with reverse home mortgage growth come increased opportunities for fraud and scams. Reverse mortgages are different from traditional mortgages in ways that make them attractive vehicles for scam artists:
- reverse mortgages are products specifically designed for and targeted to senior citizens, the population group most vulnerable to fraud;
- scam artists know that a reverse mortgages provide the senior homeowner with relatively easy access to a sizeable pool of cash; and,
- reverse mortgages are harder to understand than traditional mortgages making it easier for the scam artist to confuse and take advantage of victims.
In this article we look at some of the tactics scam artists are using and the precautions reverse mortgage borrowers can take to protect themselves.
Scam Tactic One – Downplay Pre-Loan Counseling
An educated borrower is the scam artist's worst enemy – but it's 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 HECM, Fannie Mae's Home Keeper and Financial Freedom – require potential borrowers to have counseling with an independent counselor specially trained in reverse mortgages before taking out a loan.
In a recent Detroit-area fraud case, a corrupt lender was able to keep the borrower in the dark about the amount she was eligible to borrow. She thought her loan would be for $61,000 when in fact she was borrowing $103,000. Guess who pocketed the $42,000 difference? A thorough counseling session would have given the homeowner an accurate idea of the true amount she was eligible for. Unfortunately for the victim, the prosecutor in the case says this never happened:
“A counseling meeting explaining the reverse mortgage process was required by Financial Freedom before the loan could be processed. Mr. James allegedly informed Ms. Schultz that he would be able to waive the counseling meeting by just asking a few questions over the phone.”
Precaution: Although counseling by telephone is allowed, it is always best to meet face-to-face with the counselor. If you find that anyone you're working with in the process suggests that counseling can be done quickly over the phone or otherwise downplays the importance of pre-loan counseling, be highly suspicious.
Scam Tactic Two – Forgery
Forgery is a key part of many scams. In the Detroit case cited above, the lender requested the title company to prepare two checks payable to the homeowner: one for $61,000 which the homeowner received and a second one for $42,000 which the corrupt lender endorsed with a forged signature and deposited into his own account.
In one California case, two con artists – one working as a financial advisor the other a handyman – convinced an elderly homeowner to take out a reverse mortgage to pay for home repairs. The financial advisor opened an account for the proceeds of the loan and forged the victim's name to gain access to funds.
Another California case reported in the Santa Cruz Sentinel shows how dangerous it can be to sign “unfinished” documents:
Mrs. Sally Scott is 66 years old. While 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 seniors age 62 or older to receive cash by borrowing against their homes and does not require repayment as long as they live there. Seeking a little financial cushion, she spoke to a mortgage broker about a $10,000 reverse mortgage.
When she received the loan papers, she noticed that the loan amount was $200,000. The broker promised that he'd change the figure, but insisted that she sign the paperwork first. Trusting the broker, Mrs. Scott signed.
A week later, she received a check for $200,000. She immediately notified the broker, who apologized for the mistake and instructed her to wire the money back. As it turned out, the account that Mrs. Scott returned the money to belonged to the broker. He disappeared, leaving her with a mortgage in default and no way to repay the loan.
Precaution: Never sign documents with blanks to be filled in or corrections to be made later. Carefully protect access to your checking and other accounts. Review and reconcile checking account and loan statements regularly. If you find something awry, contact your financial institution immediately.
In the Detroit case cited above, the victim caught on to the scam when she received a loan statement indicating 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. Reviewing your credit report each year is also a good way to catch unauthorized financial activities under 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 seized on this to offer – for a fee – reverse mortgage information and services that are available to consumers at no charge.
For example, some senior homeowners have been contacted by firms offering to assist them in finding a reverse mortgage lender, in exchange for a percentage of the loan. This type of arrangement should always be avoided. According to HUD's 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 without cost, and HUD-approved housing counseling agencies are available for free, or at minimal cost, to provide information, counseling, and free 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.
Precaution: 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 several excellent books that have been published in recent years.
If you feel you have need for a professional financial planner to assess your overall situation – including the reverse mortgage decision – find a certified financial planner (CFP) who works on a fee-only basis and who is knowledgeable of reverse mortgages (many aren't).
Scam Tactic Four – Posing as a Government or Non-Profit Representative
The most popular form of reverse mortgage – the Home Equity Conversion Mortgage (HECM) – is an official program of the U.S. Department of Housing and Urban Development (HUD). However, neither the HECM program nor other reverse mortgage programs are marketed directly to senior homeowners by government employees.
Unscrupulous reverse mortgage salesmen have been known to represent themselves to elderly homeowners as government representatives or volunteers for non-profit organizations.
Precaution: Be sure you know who you are dealing with and what organization they represent. Do not be timid about asking for information such as their home office location and phone number. Use resources like HUD and the National Reverse Mortgage Lenders Association (NRMLA) to check out the company.
Scam Tactic Five – Bundling Things with Reverse Mortgage Financing
Smart consumers know that the best way to shop for a car is to separate the parts of the transaction – purchase, financing and trade-in – from each another. With a bundled transaction, it's easy for the consumer to be befuddled and not understand the true cost of the overall deal. What appears to be a “great price” on the car may mask exorbitant finance charges or a low trade-in value.
Similarly, a common tactic of scam artists 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, elderly 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 truck-mounted billboards.
Frequently, 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 contractor who was party to the scam and who grossly overcharged the victim for repair work.
If you find yourself dealing with someone who attempts to bundle a reverse mortgage with another product or service or steer you to a particular contractor/lender, be highly suspicious. If you feel at all uncomfortable or that the person is using high-pressure sales tactics, walk away.
Precaution: When home improvements or estate planning services are needed, shop for the best deal. It's best for you to find what you're looking for rather than them finding you. Homeowners should avoid doing business with anyone who comes uninvited to the door, makes an unsolicited phone call or whose name is found randomly on a flier.
When you've found the best deal, then weigh your financing options – including a reverse mortgage. Keeping these decisions separate will protect you from possible fraud and help ensure you get the most for your money.