Five reverse home mortgage scams to watch out for
by all accounts reverse home mortgage growth will 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 tools many of these retirees will use to tap into that nest egg for living expenses after retirement. The number of new HUD home equity conversion mortgages (HECMs) is already up more than a percent in the first nine months of 2006 compared to the same period a year ago.
But along with reverse growth in home mortgages comes increased opportunities for fraud and scams. Reverse mortgages differ from traditional mortgages in ways that make them attractive vehicles for fraudsters:
- reverse mortgages are products specifically designed and targeted at senior citizens, the population group most vulnerable to fraud;
- scammers know that reverse mortgages provide the senior homeowner with relatively easy access to a significant amount of money; and,
- reverse mortgages are more difficult to understand than traditional mortgages, making it easier for a 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.
First scam tactic – downplaying pre-loan consultations
An educated borrower is a scammer’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 consult with an independent advisor specifically trained in reverse mortgages before taking out a loan.
In a recent fraud case in the Detroit area, a corrupt lender managed 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 she was actually borrowing $103,000. Guess who picked up the $42,000 difference? A thorough counseling session would give the homeowner an accurate idea of the true amount she was eligible for. Unfortunately for the victim, the prosecutor in the case says that never happened:
“A counseling session explaining the reverse mortgage process was required by Financial Freedom before the loan could be processed. Mr. James allegedly informed Ms. Schultz that she would be able to opt out of the counseling appointment by simply asking a few questions over the phone.’
Precautions: Although telephone counseling is permitted, it is always best to meet the counselor face-to-face. If you find that someone you work with in the process suggests that the consultation can be done quickly over the phone or otherwise downplays the importance of the pre-loan consultation, be very suspicious.
Second tactic of deception – forgery
Counterfeiting is a key part of many frauds. In the Detroit case cited above, the lender asked the title company to prepare two checks payable to the homeowner: one for $61,000, which the homeowner received, and a second for $42,000, which the corrupt lender endorsed with a forged signature and deposits into his own account.
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 with the loan proceeds and forged the victim’s name to gain access to funds.
Another California case reported in Santa Cruz Sentinel shows how dangerous signing “unfinished” documents can be:
Mrs. 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 seniors 62 or older to receive cash by borrowing against their homes and requires no repayment while living there. Looking for some financial cushion, she talked to a mortgage broker about a $10,000 reverse mortgage.
When she received the loan documents, she noticed that the loan amount was $200,000. The broker promised that he would change the number, but insisted that she sign the documents 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 error and instructed her to return the money. As it turned out, the account to which Mrs. Scott returned the money was the broker’s. He disappeared, leaving her with a delinquent mortgage and no way to repay the loan.
Precautions: Never sign documents with blanks that need to be filled in or corrections that need to be made later. Carefully protect access to your checking and other accounts. Regularly review and reconcile checking and loan statements. If you find anything 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 that her reverse mortgage balance (including interest) was $131,000.
Plus, 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 activity under your name.
Third Scam Tactic – Charging for Free Reverse Mortgage Information
The complexity of reverse mortgages means it’s natural for borrowers to seek help and guidance to help them understand the lending process, find a lender, or generally better understand what they’re getting into. Some scammers have taken advantage of this to offer, for a fee, reverse mortgage information and services that are available to consumers for free.
For example, some elderly homeowners have been contacted 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 using an estate planning service or any other service that charges a fee just to refer 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, 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.
Precautions: Get rid of 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 several excellent books published in recent years.
If you feel you need a professional financial planner to evaluate your overall situation – including the reverse mortgage decision – find a fee-only certified financial planner (CFP) who is familiar with reverse mortgages (many are T).
Fourth Deception Tactic – Impersonate a representative of a government or non-profit organization
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 sold directly to senior homeowners by government officials.
Unscrupulous reverse mortgage salespeople have been known to pose to elderly homeowners as government representatives or volunteers for non-profit organizations.
Precautions: Make sure you know who you’re dealing with and what kind of organization they represent. Don’t be afraid to ask for information like their home office location and phone number. Use resources like HUD and the National Reverse Mortgage Lenders Association (NRMLA) to check out the company.
Deceptive 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 deal—purchase, financing, and trade-in—from one another. With a bundled transaction, it is easy for the consumer to be confused and not understand the true cost of the total transaction. What appears to be a “great price” on the car may mask excessive finance charges or low trade-in value.
Likewise, a common tactic of scammers is to bundle reverse mortgage financing with something else, such as home improvements, annuities, venture investments, living trusts, or other estate planning products.
In one case in the Seattle area, elderly consumers were told that living trusts had to 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 mounted on trucks.
Often two or more fraudsters work as a team. For example, in the California case cited earlier, an unscrupulous financial advisor referred the homeowner to a home improvement contractor who participated in the scam and who grossly overcharged the victim for repair work.
If you find yourself dealing with someone who is trying 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.
Precautions: When home improvements or estate planning services are needed, shop around for the best deal. It’s best that you find what you’re 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.
When you find the best deal, weigh your financing options — including a reverse mortgage. Keeping these decisions separate will protect you from possible scams and help you get the most bang for your buck.
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