As reverse mortgages become increasingly popular and lenders ratchet up their marketing efforts to woo seniors as potential clients, a parallel trend runs the risk of emerging: reverse mortgage fraud. The root of the problem is not the reverse mortgage itself, but rather the miscreant breed of con artists who prey on senior citizens.
Reverse mortgage fraud, not unlike the product itself, is hardly a new concept. In August 1999, Consumers Union reported the Housing and Urban Development (HUD) estimated "several hundred seniors nationwide have been cheated by unscrupulous lenders and third-party "estate planning' firms who take advantage of consumers' relative lack of knowledge about reverse mortgages to entice them to agree to unfair or illegal contract terms."
But as the number of senior citizens rises, the interest in reverse mortgages has grown substantially. The Federal Housing Administration (FHA) insured 76,351 Home Equity Conversion Mortgages (HECMs) in 2006, up from 43,131 in 2005. Ninety percent of all reverse mortgages are insured by the government through HECM products.
The FHA connection has helped, to a large extent, in keeping predatory lenders out of the reverse mortgage market. "The reverse mortgage is the most regulated mortgage product out there," says Darryl Hicks, vice president of communications with the National Reverse Mortgage Lenders Association.
To date, the vast majority of fraud activity involving reverse mortgages has centered on rip-off artists pretending to be brokers or financial advisors. One of the most notable cases culminated in the June 2006 arrest of Anthony James, who was charged with scamming up to 40 Detroit-area homeowners of nearly $1 million. James was apprehended following his con job on an 84-year-old woman, who was ripped off for $42,000 in a bogus reverse mortgage scheme.
But that's not to say there is a total absence of dishonest originators. "A recent reverse mortgage scheme that we saw was one where the fraud took place up front," says Miriam Smolen, associate general counsel with Fannie Mae. "The originator misled the elderly families about the amounts they would receive, and they just skimmed the money off the top."
Reverse mortgage fraud has already affected legislation in one state. California, which represents 40% of the nation's reverse mortgage market, enacted a law last September requiring reverse mortgage applicants to first receive a briefing from a HUD-approved independent credit counseling agency about the merits and problems inherent to this particular product.
The California law came about following the news of a retired Palo Alto civil servant who was sold a reverse mortgage but whose broker instead arranged a traditional mortgage (the broker disappeared with $190,000 in loan proceeds and is still at large).
Sometimes, the potential for fraud is more than obvious. Last February, syndicated columnists Gail Liberman and Alan Lavine wrote about a TV commercial that suggested viewers call an "AARP counselor to obtain a certificate for a reverse mortgage." The solicitation came from someone billing himself as a "senior advisor." Liberman and Lavine checked the national database for the Certified Senior Advisors but could not locate the man in the commercial.
Even worse, the pitchman's claim about AARP handing out certificates for this product was blatantly false. "The AARP does not endorse any reverse mortgage or reverse mortgage lender," says Ken Scholen, director of the AARP Foundation's reverse mortgage education project. "All of our material states that again and again."
From his vantage point, Scholen has received reports of a disturbing trend regarding reverse mortgage. "We've heard of people being induced to take out this type of loan and use the proceeds to invest in or purchase a tax-deferred variable annuity," he says. "But there is no way you can earn enough on that investment to equal the value of the loan."
Scholen also notes the popularity of the product has, perhaps inadvertently, created a new market for fraudsters.
"Previously, seniors with a low-to-moderate income were not much of a target for a scam," he notes. "By inducing them to take out loans against their homes, you have a lot more wherewithal to work with there. Now there's a new target for a scam because the seniors have more liquid wealth then before."
However, one reverse mortgage lender believes that the growing awareness of the product is actually helping to diminish the potential for fraud rather than fuel it.
"As the product is more aggressively marketed, the opportunity to do scams goes down," explains Sean Marsh, chief executive officer at One Reverse Mortgage in San Diego. "And as Wall Street becomes more interested in the product, it creates a chain of events that drives towards an increase in consumer awareness."
Marsh adds that many lenders are going out of their way to offer information, both on their Web sites and in marketing collateral, on how consumers can identify reputable originators. "The more awareness there is, the less opportunity there is to create scams," he says.