The rising popularity of federally insured reverse mortgages attracted 1,500 new lenders into the program last year, more than doubling the total of participating lenders. And while reports of consumer abuse and fraud are infrequent, legislators and regulators are calling for strengthened oversight to protect seniors from aggressive or outright unscrupulous lenders.
The federal Home Equity Conversion Mortgage (HECM) program allows homeowners aged 62 and up to borrow money against the equity in their homes. The funds are available as lump sums, regular payments or lines of credit. Borrowers can remain in their homes as long as they're able without making further mortgage payments. They do, however, need to pay property taxes and insurance and keep up the home. The interest payments on the money they borrow are paid to lenders out of the remaining equity in the home. If borrowers stay in the home long enough to use up all their equity, they generally face no further financial obligation to the lender.
[See The New Rules of Reverse Mortgages.]
At field hearings this week in St. Louis, convened by Missouri Democratic Sen. Claire McCaskill, attention was focused on beefing up the legally required consumer consulting sessions that are supposed to help potential borrowers understand the complicated HECM program and make sound decisions. As it turns out, according to a report by the General Accountability Office (GAO), the sessions often exclude key information that consumers should know. Under current rules, counseling sessions also can be done on the telephone, and some regulators feel face-to-face meetings should be required.
The GAO also reviewed HECM lender marketing materials and highlighted six promotional claims and reasons they might mislead consumers:
1) Never owe more than the value of your home. Borrowers or their heirs could have a loan balance greater than the value of the home. While they could walk away from the property and not owe the money, they would need to pay it if for any reason they wanted to keep the home. The GAO said this was the most common misleading statement it encountered and was even made in government materials that were later changed.
2) Implications that the reverse mortgage is a “government benefit” or otherwise, not a loan. HECMs are federally insured but they are a loan, not a benefit.
3) "Lifetime income" or “Can’t outlive loan”. Borrowers can arrange to receive monthly payments so long as they stay in the home. But the payments cease when they leave or if they violate other conditions of the mortgage.
4) Never lose your home. Lenders can foreclose on a HECM borrower’s home if the borrower did not pay property taxes and hazard insurance or did not maintain the house.
5) Misrepresenting government affiliation. Some materials include government symbols and logos, and imply the lender is a government agency.
6) Claims of time and geographic limits. Some lender claims falsely imply that HECM loans are limited to a certain geographic area, or that the consumer must respond within a certain time to qualify for the loan.
Additional concerns were raised by Anthony G. Medici, a Housing and Urban Development criminal investigator. Again, while actual abuses are not large in number, he testified that the rising attractiveness of HECM loans, coupled with growing financial needs among seniors, makes the program more susceptible to fraud. A specific fraud involving "hundreds" of current cases, he said, recruits phony home buyers who move into abandoned or foreclosed properties that have been purchased for little money. Using fraudulent HECM applications, a reverse loan is executed on the property and funds are paid out in a lump sum to the organizers of the fraud. Some of the buyers are innocent, Medici said, and are forced out of the home because they can't pay for upkeep, insurance and taxes.
[See Is a Reverse Mortgage Right for You?]