Staying vigilant against Internet scams and other fraud has become a natural part of life for many consumers, yet scams are successfully perpetrated every day. One reason is that individuals who intend to commit fraud have become more creative than ever, and they choose their targets with care.
One group of people that scammers like to target are older people, believing them to be less quick to catch on to a potentially harmful scheme than younger people. In recent years, as the number of homeowners over the age of 65 who opt for reverse mortgages rose, so has the prevalence of reverse mortgage scams.
- Scam artists often prey on older people with various mortgage and investment schemes.
- A Home Equity Conversion Mortgage (HECM) is a tool available to people over the age of 62 and can be helpful in retirement.
- It allows homeowners to borrow money, and the amount typically depends on the home's value, the age of the homeowner, and the amount of equity in the home.
- Many scams involve phony appraisals of home values or inaccurate loan documents.
- Older people considering a reverse mortgage should begin at the HUD website and talk to a reverse mortgage counselor.
The Home Equity Conversion Mortgage (HECM) is the FHA's reverse mortgage program, which is available to homeowners age 62 and older and can be a valuable financial tool for tapping into home equity and providing income for people who have retired. Homeowners working with a legitimate reverse mortgage lender will be required to participate in financial counseling to ensure that they understand the loan and how it works.
Even so, if you are considering a reverse mortgage as a retirement tool, watch out for the potential scams below.
1. Foreclosure Scams
Perpetrators sometimes go after older people who are in danger of losing their homes to foreclosure. They artificially inflate the house's value with the help of a dishonest appraiser and then obtain a reverse mortgage on the property. After the mortgage approval, the scammers have the person transfer the title to them, leaving the person without a home and without the funds from the reverse mortgage.
Another way of defrauding older homeowners is to work with a fake financial institution that will inform the owners that they cannot qualify for a reverse mortgage but that they can have a different type of loan. During the closing, the title to the property will be transferred away from the homeowners.
2. Equity Theft Scams
Complicated equity theft schemes often involve several individuals who work together to buy a distressed property or a foreclosure. They then obtain an inflated appraisal and recruit an older person to repurchase the property and take out a reverse mortgage on it.
Usually, the settlement "attorney" for the reverse mortgage is also in on the scam. These individuals abscond with funds from the reverse mortgage at settlement, leaving the older person with little or no equity and no cash.
3. Free Homes
Scammers and con artists use advertising to recruit older people to live in a home to obtain a reverse mortgage on the property. The scammers keep the reverse mortgage proceeds, and the older person pays the property taxes and insurance on the home.
Generally, the reverse mortgage is obtained on a false, inflated appraised value. Once the older person passes away or move, the reverse mortgage lender is stuck with a loss due to the lack of real value in the home.
4. Document Fraud
Some con artists simply send letters to older people about their loan documents, such as a "Reconveyance Deed," requesting money to provide them with copies of the deed. This document should be on file with the lender.
Other scam artists charge money to older people, sometimes thousands of dollars, for information about a reverse mortgage that is available free from the Department of Housing and Urban Development (HUD).
5. Investment Scams
Some scams are specifically geared to getting the target to "invest" in an annuity or real estate fund affiliated with reverse mortgages. The victims will lose the money they invested when the con artist, usually someone associated with a fraudulent reverse mortgage lender, walks away with the funds.
Tips for Avoiding Scams
Older people interested in learning more about their options for a reverse mortgage should start by going to the HUD website. It explains the basics of these loans and has a link for finding a HUD-approved HECM counselor. Another option to try is the National Council on Aging website. Homeowners can also receive a free booklet from the National Council on Aging about reverse mortgages.
Reverse mortgage proceeds can be received as a lump sum, in monthly payments, or as a line of credit. The amount to be borrowed depends on the homeowners' ages, the home's value, and how much equity is available. The loan will be repaid when the home is sold or if the homeowner passes away. If any home equity remains after the loan is repaid, the funds go to the homeowners or their heirs.
Homeowners cannot be forced out of their homes because of a reverse mortgage. However, they remain obligated to keep the property maintained, pay their property taxes, and pay for homeowners' insurance.
The FBI has a few other tips and suggestions:
- Do not respond to unsolicited advertisements.
- Be suspicious of anyone claiming that you can own a home with no down payment.
- Do not sign anything that you do not fully understand.
- Seek out an experienced reverse mortgage counselor.
Also, remember that other people might not be able to spot these scams. Reverse mortgage scammers specifically target older people with disabilities. By reporting potential scams, you can help to protect them.
Finally, be aware that you do not need to hire a high-priced attorney if you suspect someone has defrauded you or your family. If you contact the authorities soon enough, they may be able to recover the money.
Reverse mortgage scams are illegal. If you believe that scammers targeted you based on age, disability, military service, race, religion, sex, marital status, use of public assistance, national origin, or other factors, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
The Bottom Line
Avoiding scams and obtaining legitimate information on a reverse mortgage can make this loan product a valuable financial tool for older people and their families. Like any mortgage, you need to consult the appropriate professionals and do your homework before you sign on the dotted line. Otherwise, you risk being taken advantage of by financial predators.