by all accounts, Reverse mortgage Growth is set to explode. Baby boomers are reaching retirement, and for most people, 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 cash in on that egg for their retirement living expenses. The number of new HUD Capital Conversion Mortgages (HECM) actually increased by more than a percentage in the first nine months of 2006 compared to the same period one year earlier.
But along with the reverse growth of the mortgage comes increased opportunities for fraud and scams. Reverse mortgages differ from conventional mortgages in ways that make them an attractive vehicle for scam artists:
- Reverse mortgages are products specifically designed and targeted at seniors, the demographic most vulnerable to fraud;
- Scam artists know that reverse mortgages provide senior homeowners with relatively easy access to a large pool of cash; And the,
- Reverse mortgages are more difficult to understand than traditional mortgages which makes it easier for the scam artist to confuse and take advantage of the victims.
In this article we look at some of the tactics scam artists use and precautions reverse mortgage borrowers can take to protect themselves.
First fraud tactic – underestimating the importance of pre-loan counseling
An educated borrower is the con artist’s worst enemy – but it is up to the borrower to educate themselves and take advantage of advice 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 prospective borrowers to seek advice with an independent advisor specifically trained in reverse mortgages before obtaining a loan.
In a recent Detroit area fraud case, the corrupt lender was able to keep the borrower aware of how much she was eligible to borrow. She thought her loan would be $61,000 when in reality she was borrowing $103,000. Guess who got the $42,000 difference? A comprehensive counseling session would have given the homeowner an accurate idea of the real amount she was eligible for. Unfortunately for the victim, the prosecutor in the case said that never happened:
“Financial Freedom requested a counseling meeting explaining the reverse mortgage process before processing the loan. Mr. James allegedly told Ms. Schultz that he would be able to waive the counseling meeting simply by asking a few questions on the phone.”
Warning: Although counseling over the phone is permitted, it is always best to meet the counselor face-to-face. If you find that anyone you work with in this process is suggesting that counseling can be done quickly over the phone or downplaying the importance of pre-loan counseling, be very careful.
The second cheating tactic – forgery
Counterfeiting is an essential part of many scams. In the aforementioned Detroit case, the lender required the lending company to prepare two checks payable to the homeowner: one for $61,000 that the homeowner obtained and one for $42,000 that the corrupt lender endorsed with a forged signature and deposited into his own account. .
In one case in California, two con artists—one 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 access the funds.
Another case was reported in California Santa Cruz Ranger It shows how dangerous it is to sign “incomplete” documents:
Mrs. Sally Scott is 66 years old. While she receives Social Security checks and pensions, she still can’t make ends meet. I saw an advertisement for a “reverse” mortgage—a loan that allows seniors 62 or older to get cash by borrowing against their home and doesn’t require repayment as long as they live there. Seeking a little financial protection, I spoke to a mortgage broker about a $10,000 reverse mortgage.
When I got the loan papers, I noticed that the loan amount was $200,000. The broker promised that he would change the number, but he insisted that he sign the papers first. Mrs. Scott signed confidence in the broker.
A week later, she received a check for $200,000. She immediately notified the broker, who apologized for the mistake and ordered her to return the money. As it turned out, the account to which Ms. Scott returned the money belonged to the broker. He disappeared, leaving her with a defaulted mortgage and no way to repay the loan.
Warning: Never sign documents that contain spaces or corrections to be made later. Carefully protect access to checking and other accounts. Reviewing and reconciling current accounts and loan statements regularly. If you find something strange, contact your financial institution immediately.
In the aforementioned Detroit case, the victim was caught in 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 catch unauthorized financial activities under your name.
Third Scam Tactic – 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 in general, better understand what they are getting. Some scammers have taken advantage of this to offer – for a fee – available reverse mortgage information and services to consumers for free.
For example, some large homeowners have been approached by companies offering 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 THE USE OF AN ESTATE PLANNING SERVICE, OR ANY SERVICE THAT CHARGE FEE JUST TO REFER THE BORROWER TO THE LENDER! HUD provides this information at no cost, and HUD-accredited housing advisory agencies are available at no charge, or at minimal cost, to provide free information, counseling, and referral to a list of HUD-approved lenders. Call 1-800-569-4287, toll-free, to find out the name and location of a HUD-accredited housing counseling agency near you.
Warning: Stay 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 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 is knowledgeable about reverse mortgages. R).
Fourth Scam Tactic – Appearing as a government or non-profit representative
The most common form of reverse mortgage – a home equity transfer mortgage (HECM) – is an official program of the US Department of Housing and Urban Development (HUD). However, neither HECM nor other reverse mortgage programs are marketed directly to senior homeowners by government employees.
Unscrupulous mortgage sellers have been known to represent themselves to elderly homeowners as government representatives or volunteers for non-profit organizations.
Warning: Make sure you know who you are dealing with and what organization they represent. Feel free to ask 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.
Fifth tactic of fraud – bundling things up with reverse mortgage financing
Savvy consumers know that the best way to buy a car is to separate the parts of the deal — buying, financing, and bartering — from one another. With a bundle deal, it is easy for the consumer to get confused and not understand the true cost of the bundle deal. What appears to be a “great price” on a car may be hiding exorbitant financing charges or a low trade-in value.
Similarly, a common tactic for con 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 credits must be purchased in order to obtain a reverse mortgage. In another, seniors were encouraged to take out a reverse mortgage 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 mentioned earlier, an unscrupulous financial advisor directed the homeowner to a home repair contractor who was party to the scam and who overcharged the victim for the repair work.
If you find yourself dealing with someone trying to associate a reverse mortgage with another product or service or directing you to a specific contractor/lender, be extremely suspicious. If you feel at all uncomfortable or the person is using high-pressure sales tactics, walk away.
Warning: When home improvement or estate planning services are needed, shop around for the best deal. It is better for you to find what you are looking for than to be found. Homeowners should avoid dealing with anyone who comes uninvited, makes an unsolicited phone call, or whose name is found randomly in a posting.
When you find the best deal, weigh your financing options — including a reverse mortgage. Separating these decisions will protect you from potential fraud and help ensure that you are getting the most bang for your buck.