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 the elderly. They convince folks to sign up for a financial product that’s complicated even for the well-informed, much less someone whose mental acuity may have diminished with age. They then steal the proceeds, leaving the borrower with new debt on their home or, even worse, no home at all.
There are situations for which a reverse mortgage is a good solution. There are many other times when this kind of financing is a terrible choice. In this article, we'll tell you about common reverse mortgage scams so you can avoid them and warn others, too.
Vendor and Contractor Fraud
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 other home-improvement service. When the target expresses concern about paying, the scammer has the solution: a reverse mortgage. A great way for the vendor or contractor to get paid, but probably not in the homeowner's best interest.
If you truly need home repairs and have no other way to pay, a home-equity loan or home equity line of credit can be a far less expensive and consequential option. Any home-improvement vendor or contractor who suggests that you pay for work with reverse mortgage proceeds isn’t someone you want working on your house. Their work could be as shoddy as their financial advice.
Fraud by Relatives, Others
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. If this person is unscrupulous or ill-informed enough to propose 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 others the power of attorney over your affairs. This document enables the holder to conduct financial affairs on your behalf, including taking out a reverse mortgage. Children and other people whom seniors have entrusted to manage their affairs have secured reverse mortgages in the senior’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 to 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 obtain a special type of reverse mortgage called a Home Equity Conversion Mortgage (HECM) to pay for the house, then find a way to divert the proceeds to themselves. The seniors think they’re getting housing through a Housing and Urban Development program when they’re really being taken to the cleaners.
Robbing Peter and (Not) Paying Paul
In July 2010, a Florida man was sentenced to 22 years in prison and ordered to pay $1 million in restitution for fraudulent transactions involving reverse mortgages. The man marketed reverse mortgages to seniors, arranged the closings, and then pocketed the money for himself. He also targeted homeowners facing foreclosure, convincing them to take out reverse mortgages to bring their outstanding loans current. But instead of transmitting the money to pay off the regular mortgages, he would walk away with the proceeds, leaving the homeowners facing default.
Other Misleading Tactics
While high-pressure sales are not necessarily scams or frauds, neither are they in your best interest. Taking out a reverse mortgage requires careful consideration and a complete understanding of the details and consequences. If a reverse mortgage lender makes you feel rushed, stressed or uncomfortable, turn around and find another lender. They aren’t hard to come by. Also, should you regret signing a loan, your right of rescission gives you the right to cancel the loan within three business days of closing 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) found 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."
The bureau conducted focus-group interviews with 59 homeowners old enough to qualify for a reverse mortgage. It found that celebrity spokespeople appearing in ads created a false sense of trust concerning reverse mortgages. Some ads didn’t make clear that a reverse mortgage was a loan, while other ads made it seem impossible for a borrower to lose their home (not true). Some ads gave the impression that reverse mortgages are a government-run program, which is also not true, though the most common reverse mortgage, the Home Equity Conversion Mortgage, is insured by the Federal Housing Administration.
The Bottom Line
Law enforcement sometimes fails to catch or adequately punish reverse mortgage scammers. As a result, some scammers have been able to commit reverse mortgage fraud repeatedly, 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.
- Complete Guide to Reverse Mortgage
- Comparing Reverse Mortgages vs. Forward Mortgages
- Do You Qualify for a Reverse Mortgage?
- Reverse Mortgage Types
- How to Choose a Reverse Mortgage Payment Plan
- Reverse Mortgage or Home-Equity Loan?
- 5 Top Alternatives to a Reverse Mortgage
- 5 Signs a Reverse Mortgage Is a Good Idea
- 5 Signs a Reverse Mortgage Is a Bad Idea
- How to Avoid Outliving Your Reverse Mortgage
- A look at Regulation of Reverse Mortgages
- Rules For Obtaining an FHA Reverse Mortgage
- Reverse Mortgage: Could Your Widow(er) Lose the House?
- Reverse Mortgage Pitfalls