Reverse mortgages, the kind of loans sold by aging celebrities to seniors interested in converting the equity in their homes into cash, aren’t the safe haven they are portrayed by marketers, according to a General Accounting Office report released in July.
In fact, there is growing concern that reverse mortgages, also known as Home Equity Conversion Mortgages or HECMs, offer a ripe field for mortgage fraud scammers. Claims made by marketers of the mortgages to seniors are potentially misleading because they are inaccurate, incomplete and use questionable sales practices, according to the GAO and Senator Claire McCaskill (D-Mo.), who has doggedly called for better consumer protection for senior citizens targeted by mortgage companies.
Such fraud “is occurring in every region of the United States and reverse-mortgage schemes have the potential to increase substantially,” according to the Federal Bureau of Investigation and the Office of Inspector General at the U.S. Department of Housing and Urban Development, which oversees the federally insured loans that account for some 99% of the reverse-mortgage market properties.
Various types of fraud have been popping up across the country, including organized schemes of systematically inflating house appraisals to increase the lender’s profit off the senior and the federal government. With the government’s role backing these loans, the lenders have very little to lose. One scheme, prevalent in the Upper Midwest and Southeast, involves the use of “straw buyers” and flipping properties. Speculators purchase distressed properties and, with the aid of cosmetic repairs and inflated appraisals, deed them to senior straw buyers at above-market prices. Seniors-some of whom may be part of the scheme-typically are promised homes for no money down. In return, they secure a reverse mortgage and divert some, if not all, of the proceeds to the scheme’s promoters. Regulators say promoters have even recruited seniors from homeless shelters.
This fiscal year HUD has referred 29 cases of suspected fraud involving hundreds of properties to its Office of Inspector General for investigation, up from two the year before and the FBI is also seeing an increase. Indeed, HUD’s data on suspected fraud likely understates the extent of the problem, according to government sources.
“Ten thousand baby boomers become eligible for a reverse mortgage every day,” said Senator McCaskill at a recent hearing. “Eighty-one percent of them own their homes. These seniors are sitting on $4 trillion in equity. That equity is of great interest to some mortgage entities - unfortunately, not all of them have the best interests of the seniors involved in mind, but rather just profit at any cost. When it comes to our nation’s seniors, this is a particularly troubling position.”
The aging of the baby boomer generation makes has created a boom in reverse mortgages. A recent study by Met Life found that 14 percent of all seniors are taking cash out of their houses through either a home equity loan or a reverse mortgage. The study, jointly conducted with the National Council on Aging, indicated that older homeowners are using home equity to increase income security, to deal with unexpected expenses, to improve debt management, to delay Social Security collection, consolidate credit card debt, and to pay out-of-pocket home and health care expenses.
“Our research on baby boomers indicates that they are more open than previous generations to tapping home equity and considering reverse mortgages to help fund their retirement,” said Sandra Timmermann, director of the MetLife Mature Market Institute, in a statement. “With the right guidance and policy protection, reverse mortgages can be an important financial option for boomers who do not have adequate savings.”
The National Consumer Law Center is expected to release a report in the coming weeks that will detail needed protections and improvements in the reverse mortgage market. It will include a number of recommendations to protect senior consumers, increase regulation and improve data collection on reverse mortgages and other equity conversion products.
Reverse mortgage lenders, who include Bank of America and Genworth Financial as well as MetLife, are increasingly concerned about the impact f the publicity and political pressure.
“Reverse mortgages are still a relatively new financial product and they require constant reexamination. But during this evolutionary process, we cannot overlook that in an economy where there are few if any loans to be had, home values have plummeted and the value of retirement accounts have fallen, reverse mortgages are vital to the future security and happiness of our senior population,” said Marty Bell, director of communications for the National Reverse Mortgage Association, in a statement on the association’s Web site.
NRMLA requires its members to abide by a Code of Ethics & Professional Responsibility that addresses fairness, integrity, diligence, confidentiality and professionalism, and includes a complaint process that could lead to suspending a member.
“The National Reverse Mortgage Lenders Association may have a comprehensive code of ethics that all members must follow; however, they do not have any enforcement powers beyond their ability to no longer consider violators members. These codes of ethics have to have the force of law behind them, or they will have no meaning whatsoever. That is just like our Constitution; for instance, the First Amendment will have no meaning whatsoever if the government does not seek to uphold Free Speech,” said Senator McCaskill last month.
The Federal government itself has a huge vested interest in the reverse mortgage industry. Most reverse mortgages are insured by and HUD has now been assigned over a billion dollars in loans. Plunging home prices and rising interest rates put the government at risk for losses on those loans. Rapid growth in the industry has increased this risk to seniors and taxpayers. Since 1990, the government has backed 500,000 reverse mortgages and the Federal Housing Administration is now insuring such loans up to $625,000, an amount nearly double last year’s rate. In 2009 alone, the government is expected to back 200,000 reverse mortgages. The number of federally insured HECMs closed in 2008 was 11,261 reverse mortgages in March, a jump of 17% over last year.
Fannie Mae’s reverse mortgage portfolio grew by more than $7 billion between Dec. 31 and June 30, according to the government-sponsored enterprise’s second-quarter financial report. Its outstanding unpaid principal balance of reverse mortgages is between $40 and $50 billion.
“HUD’s internal controls do not provide reasonable assurance that counseling providers are complying with HECM counseling requirements. GAO’s undercover participation in 15 HECM counseling sessions found that while the counselors generally conveyed accurate and useful information, none of the counselors covered all of the topics required by HUD, and some overstated the length of the sessions in HUD records. For example, 7 of the 15 counselors did not discuss required information about alternatives to HECMs. HUD has several internal controls designed to ensure that counselors convey the required information to prospective HECM borrowers, but the department has not tested the effectiveness of these controls and lacks procedures to ensure that records of counseling sessions are accurate. Because of these weaknesses, some prospective borrowers may not be receiving the information necessary to make informed decisions about obtaining a HECM.” said McCaskill.