Of all financial con artists, reverse mortgage scammers are arguably the worst. They abuse their standing as trusted advisors or lenders – or supposedly professional contractors – to take advantage of elderly folks who need funds. They convince them to sign up for a financial product that’s complicated even for well-educated, fully cognizant people to wrap their heads around, much less someone whose mental capability may have diminished with age. Then they steal the proceeds, leaving the borrower with little but new debt on his home, and even – worst-case scenario – the loss of it.
There are situations for which a reverse mortgage is a good solution (For more, see: Is A Reverse Mortgage Right For You?). There are many others when this kind of financing is a terrible choice. In this article, we’ll tell you about some common reverse mortgage scams so you can avoid them and warn others, too.
In this scam, unscrupulous home-improvement vendors and contractors target the elderly with a scheme that involves trying to sell them repairs, a remodeling project or another home-improvement service. When the target expresses concern about paying for it, they’ve got the solution: a reverse mortgage. True, it might be a great way for them to get paid, but it might not be in the homeowner's best interest.
If you truly need home repairs and have no other way to pay for them, a home-equity loan or home equity line of credit can be a far less expensive and less consequential option than a reverse mortgage (see 5 Top Alternatives To A Reverse Mortgage for more ideas). Any home-improvement vendor or contractor who suggests that you pay for the work with reverse mortgage proceeds probably isn’t someone you want working on your house. Who knows: Their work could be as shoddy as their advice.
Similar to vendor and contractor fraud, fraud by a financial planner or other investment advisor involves someone trying to sell you a financial product you may not need and suggesting you take out a reverse mortgage to pay for it. If this person is unscrupulous or ill-informed enough to suggest a reverse mortgage to finance the purchase of stocks, an annuity or whole life insurance, they probably aren’t selling you something that’s in your best interest.
Be careful about giving out your – or a loved one's – power of attorney. This document enables the holder to conduct financial affairs on your (or their) behalf, including taking out a reverse mortgage on your/their house. Children and other people whom seniors have entrusted to manage their affairs have secured reverse mortgages in the senior homeowner’s name, then diverted the proceeds to their own accounts. Some swindlers have even managed to secure reverse mortgages for dead relatives.
In this reverse mortgage scam, smooth-talking realtors seek out seniors and get them take out a reverse mortgage to buy a lower-cost house, without having to put any money down. Unfortunately, these homes are often distressed properties that have been given a facelift but are really in poor condition. The scammers help the homeowners get a special type of reverse mortgage called a "Home Equity Conversion Mortgage (HECM) for purchase" to pay for the house, then find a way to divert some or all of the proceeds to themselves. The seniors think they’re getting housing through this Housing and Urban Development program when they’re really being taken to the cleaners.
In July 2009 in Orlando, a title insurance company confessed to stealing $1 million in reverse mortgage proceeds from seniors. Instead of transmitting the money to pay off borrowers’ regular mortgages, as it promised, the firm kept the money. The result was that reverse mortgage holders who thought part of their loan proceeds were being used to pay down their debt, and increase their equity in their homes, unexpectedly and ironically ended up in foreclosure, because they had defaulted on their mortgage payments.
While high-pressure sales are not necessarily scams or frauds, they aren’t in your best interest, either.Taking out a reverse mortgage is a decision that requires careful consideration and a complete understanding of the details and consequences (see Reverse Mortgage Pitfalls). If a reverse mortgage lender is making you feel rushed, stressed out or uncomfortable in any way, turn around and find another lender; they aren’t that hard to come by. In a scenario where you go through with the deal and immediately regret it, you can cancel within three business days of closing the loan under your right of rescission by notifying your lender in writing.
False or misleading advertising that convinces a homeowner to get a reverse mortgage without fully understanding the implications – or when another solution might provide financial security without sacrificing the home– continues to plague the marketplace. A report by the Consumer Financial Protection Bureau (CFPB) states that many of the nearly 100 reverse mortgage advertisements it analyzed “contained confusing, incomplete, and inaccurate statements regarding borrower requirements, government insurance, and borrower risks.”
In focus-group interviews with 59 homeowners old enough to qualify for a reverse mortgage, the CFPB found that the celebrity spokespeople some reverse mortgage lenders use can create a false sense of security about reverse mortgages. The study also found that some ads don’t make it clear that a reverse mortgage is a loan; that ads make it seem like it's impossible for a borrower to lose his home (not true); and that reverse mortgages are government-funded and -operated (also not true, though the most common type, Home Equity Conversion Mortgages (HECM), are insured by the Federal Housing Administration).
Law enforcement sometimes fails to catch or to adequately punish reverse mortgage scammers. As a result, some have been able to go from state to state or even stay within the same city while committing reverse mortgage fraud repeatedly over many years and accumulating dozens of victims. Be especially wary of anyone who approaches you about taking out a reverse mortgage or who pressures you to close the deal.
And if you do decide that a reverse mortgage might make sense for you, first read Picking the Right Reverse Mortgage Lender.