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by all accounts, reverse home mortgage The development is ready to explode. Baby boomers are reaching retirement and for most, home equity makes up the largest portion of their nest egg. Reverse mortgages will be the tool 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 (HECMs) has already increased by more than a percentage point in the first nine months of 2006 compared to the same period a year earlier.
But with reverse home mortgage growth have come opportunities for fraud and scams. Reverse mortgages differ from traditional mortgages in ways that make them attractive vehicles for scam artists:
- Reverse mortgages are products that are specifically designed and targeted at senior citizens, the population group most vulnerable to fraud;
- Scam artists know that a reverse mortgage gives the senior homeowner relatively easy access to a large pool of cash; And,
- Reverse mortgages are harder to understand than conventional mortgages, making it easier for scam artists to confuse and take advantage of victims.
In this article, we’ll take a look at some of the tactics scam artists use 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 himself and take advantage of counseling and other opportunities to learn about reverse mortgages.
All three major reverse mortgage programs — HUD HECM, Fannie Mae Home Keeper and Financial Freedom — require potential borrowers to consult with an independent counselor specifically trained in reverse mortgages before committing to 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 $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 exact amount she was eligible for. Unfortunately for the victim, the prosecutor in the case says that never happened:
“A counseling meeting explaining the reverse mortgage process was required by Financial Freedom before the loan could be processed. Mr. James reportedly informed Ms. Schultz that he would be able to waive the counseling meeting by asking a few questions over the phone. “
Caution: Although counseling by telephone is permitted, it is always best to meet with a counselor face-to-face. If you find that anyone you are working with in this process suggests that counseling can be done quickly over the phone or otherwise downplays the importance of pre-loan counseling, be highly suspicious. Be it
Scam Tactic To – Fraud
Counterfeiting is a major part of many scams. In the Detroit case cited above, the lender requested the title company draw up two checks payable to the homeowner: one for $61,000 that the homeowner received and another for $42,000 that the corrupt lender endorsed with a forged signature and deposited into his account. Deposited in ,
In one California case, two con artists — one working as a financial advisor and 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 loan proceeds and forged the victim’s name to receive the funds.
Another case was reported in California Santa Cruz Sentinel Shows how dangerous signing “incomplete” documents can be:
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 borrow against their homes and get cash and make repayments for as long as they live there. is not required. Looking for a little financial help, she talked to a mortgage broker about a $10,000 reverse mortgage.
When she received the loan papers, she saw that the loan amount was $200,000. The broker promised he would change the figure, but insisted on signing the paperwork first. Mrs. Scott signed, trusting the broker.
A week later, she received a check for $200,000. He immediately informed the broker, who apologized for the mistake and instructed him to refund the money. As it turned out later, the account to which Mrs. Scott returned the money belonged to a broker. He disappeared, leaving her with a mortgage in default and no way to repay the loan.
Caution: Never sign documents by filling in blanks or making subsequent corrections. Carefully protect access to your checking and other accounts. Review and reconcile checking account and loan statements regularly. If you notice something is wrong, contact your financial institution immediately.
In the Detroit case cited above, the victim fell for the scam when she received a loan statement showing the total amount of her reverse mortgage (including interest) of $131,000.
Plus, take advantage of the free credit report available to you under federal law. Reviewing your credit report each year is also a good way to catch unauthorized financial activity under your name.
Scam Tactic Three – Charging For Free Reverse Mortgage Information
The complexity of a reverse mortgage means that it is natural for borrowers to seek help and guidance to help them understand the loan process, find a lender or generally better understand what they are getting into. Some scammers have capitalized on this – for a fee – to offer reverse mortgage information and services that are available at no charge to consumers.
For example, some senior homeowners have been approached by firms offering to help them find reverse mortgage lenders 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 at no cost, and HUD-approved housing counseling agencies are available for free or at minimal cost to provide information, counseling and free referrals to lists of HUD-approved lenders. Call 1-800-569-4287, toll-free, for the name and location of the HUD-approved housing counseling agency near you.
Caution: Stay away from anyone who offers to find you 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 published in recent years.
If you feel you need 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 in reverse mortgages. are (many are’t).
Scam Tactic Four – Posing as 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). 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.
Caution: Make sure you know who you are dealing with and what organization they represent. Don’t hesitate to ask for information like their home office location and phone number. Use resources such as HUD and the National Reverse Mortgage Lenders Association (NRMLA) to research the company.
Scam Tactic Five – 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 – from each other. With bundled transactions, it is easy for the consumer to become confused and not understand the true cost of the overall transaction. What appears to be a “great value” on the car may be hiding 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 improvement, 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 reverse mortgages and use the proceeds to “invest” in truck-mounted billboards.
Often, two or more scammers work as a team. For example, in the California case cited earlier, an unscrupulous financial advisor referred the homeowner to a home repair contractor who was involved in the scam and who charged the victim exorbitantly for repair work.
If you find yourself dealing with anyone 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 the person is using high-pressure sales tactics, walk away.
Caution: Shop around for the best deal when home improvement or estate planning services are needed. It’s best for you to find what you’re looking for rather than them looking for you. Homeowners should avoid doing business with anyone who shows up at the door uninvited, makes an unsolicited phone call or whose name is found randomly on a flyer.
When you’ve found the best deal, evaluate 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.
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