Of all the financial con artists, reverse mortgage scammers are arguably the worst because they prey on the elderly. They abuse their standing as trusted advisors or lenders—or supposedly professional contractors—to take advantage of older individuals in precarious financial situations. They convince folks to sign up for a loan product that can be complicated even for the well-informed, much less for 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.
While there may be situations when 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 will go through some common reverse mortgage scams so you can avoid them and warn others, too.
- Seniors may be targeted by scammers who convince them to take out reverse mortgages—loans designed for those who have equity in their homes.
- Homeowners should be wary of vendors and contractors who convince seniors to take out a reverse mortgage to get paid.
- Be careful about giving power of attorney to anyone who may take out a reverse mortgage in your name for their own benefit.
What Is a Reverse Mortgage?
You have probably seen the ads on television promoting reverse mortgages as a financial panacea for older homeowners. But do you really know what they are?
Reverse mortgages are actually loans available to homeowners aged 62 or older who have sufficient equity in their homes. They are relatively new financial products that provide older consumers with options if they need some cash in retirement.
Unlike a regular mortgage, the lender who provides the homeowner with payments with the home used as collateral for the reverse mortgage. The balance of the reverse mortgage loan is due when the homeowner dies or sells their home.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, 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).
Vendor and Contractor Fraud
In a contractor 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, the scammer has the solution—a reverse mortgage. It may be a great way for the vendor or contractor to get paid, it's 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 (HELOC) 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 home. After all, their work may be as shoddy as their financial advice.
Fraud by Relatives and 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 (POA) 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 are 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 (HUD) program when they’re really being taken to the cleaners.
Robbing Peter and (Not) Paying Paul
One of the ways scammers target unsuspecting homeowners is to convince them to take out a reverse mortgage to help bring their mortgage loans back in good standing or to pay for other expenses.
For example, a Florida man was sentenced to 22 years in prison and ordered to pay $1 million in restitution in July 2010 for fraudulent transactions involving reverse mortgages. The man marketed reverse mortgages to seniors, arranged the closings, and then pocketed the money for himself.
The man 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
High-pressure sales may not necessarily be scams or frauds, but they aren't 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, go out and find another lender—they aren’t hard to come by. And if you feel any regret after signing a loan, your right of rescission allows you 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. This is 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 (FHA).
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.