Avoiding Reverse Mortgage Scams

As reverse mortgages become more popular, more and more cases of reverse mortgage fraud are popping up. Since reverse mortgages typically involve your largest asset (your home), you will want to make sure that you do not fall victim to one of these scams.

Reverse Mortgage Scams

Getting charged for free information: Some companies have been charging thousands of dollars for information provided free from HUD. Typically these companies charge for this information as part of estate planning services. Seniors signing up with these contracts are unaware of that these firms are charging a fee of 6 to 10 percent of the total amount borrowed. These fees can run into the tens of thousands. HUD has issued a directive to lenders that issued reverse mortgages insured by the Federal Housing Administration (FHA) to stop doing business with these companies.

Pushing reverse mortgages as a way to pay for large purchases:Some companies will try to suggest using a reverse mortgage to purchase the items they are selling, like annuities or insurance.

Unethical reverse mortgage terms: Some reverse mortgage lenders will slip excessive fees and terms into their contracts. These can have a devestating effect a Seniors equity. In some cases lenders have used shared equity or shared appreciation terms. These fees cost homeowners equity without providing any benefit to the senior homeowner.

Protecting Yourself

What can you do to protect yourself from reverse mortgage scams?

The best way to protect yourself is to use a HUD approved reverse mortgage counselor to evaluate your situation and potential reverse mortgage contracts. The will alert you to any potential problems.

If you suspect that a compay is violating the law, let your reverse mortgage counselor know and then file a complaint with your state Attorney General's office or banking regulatory agency and the Federal Trade Commission (FTC) at www.ftc.gov.

Resource: Brought to you by Reverse Mortgage and the Reverse Mortgage Blog.

General: The Reverse Mortgage: Solution or problem?

Reverse mortgages are complex and it is sometimes hard to know whether they are the right answer for our financial problems.

Sometimes we experience monetary problems and look for options to help us as shown in the following excerpt from "The Reverse Mortgage: Solution or problem?":

Some of the monetary problems we encounter in life are not easily resolved. Often we must search for creative ways to augment income, reduce spending, and more effectively adhere to a budget. However, a most intractable predicament can involve the concluding passages of life, when financial decisions pass from the individual's control.

Understandably, many seniors are on fixed incomes that will not stretch to meet their needs. One program to address this dilemma, for citizens who own a home with substantial equity, involves a device known as a reverse mortgage. We will examine the pros and cons to see whether it appropriately meets the needs of those able to participate.

The following excerpt from the same article describes some of the dangers of reverse mortgages.

Let's now depart from generalities and get specific, for as it's truly said, the devil is in the details. I cannot deny that a reverse mortgage appears to fill a need. For an elderly homeowner with substantial equity, albeit severely limited income, who nurses a fervent desire to remain in possession of a cherished home, this device can make it possible. After acknowledging this, the question to be answered is: At what cost?

Most certainly, one thing to be said about this concept is that it's not cheap borrowing. As with any endeavor where sophisticated professionals negotiate with unknowledgeable clients, the playing field is far from level. Just as representatives of the life insurance industry regularly foist whole life and endowment policies onto an unsuspecting public, marketers of reverse mortgages aggressively promote this product to naïve and vulnerable seniors. The National Reverse Mortgage Lenders Association (NRMLA), an organization formed in 1997 by the industry, enthusiastically touts the benefits while ignoring any detriments.

A visit to their website, http://www.reversemortgage.org/, reveals a bevy of enticing declarations such as: "The funds from a reverse mortgage can be used for anything; there are no income or medical requirements to qualify; no monthly payments are due on a reverse mortgage" and other reassuring palliatives. Although a section of their site prominently itemizes many of the costs to be incurred, nowhere will you find a hint of the many complex and possibly disadvantageous clauses that may be buried in a contract. p> As one example, some reverse mortgages incorporate a provision by which the lender is entitled to a share of the property's equity appreciation. Under such circumstances, there is no way to predict what costs a borrower may actually incur. Just such an unhappy misfortune befell 83-year-old Berta Grey of San Mateo, California, whose reverse mortgage with Transamerica Corporation soared as a result of a "shared appreciation fee."

Some of the things the industry is trying to do to make it look like they are alleviating the issues:

As a way to imply that borrowers are fully informed as to the complexities of these agreements, the industry has instituted the concept of mandatory counseling. The NRMLA website proudly declares: "Before applying for a reverse mortgage, you must first meet with a counselor. The counselor's job is to educate you about reverse mortgages and offer alternative options depending on your situation." Despite this assertion, the fact is that the majority of approved counselors are not neutral parties, but rather are affiliated with lenders, much the same as credit counselors are a part of the credit card industry and function primarily as debt collectors. In actuality, the average reverse mortgage borrower is thoroughly unaware of the agreed upon terms. This is not by accident; it is designed that way.

esources: Brought to you by Reverse Annuity Mortgage Blog andReverse Annuity Mortgage Guide.

General: Marriage to Younger Spouse Limits Reverse Mortgage

Reverse mortgage elibibility is based on the age of the youngest individual who holds title. So if you have married a much younger spouse, this could significantly affect the amount of money you will recieve from the reverse mortgage.

The following question and answer from Robert J. Bruss atwww.bobbruss.com illustrates this issue:

Q: I am 78. My wife is 64. We own our home with a value of $550,000. No mortgage and no debts. We recently inquired about a senior citizen reverse mortgage and were told the most we can receive is $680 per month. The up-front fees would be about $13,000. The mortgage manager suggests we obtain a home equity loan instead. We have income of only about $60,000 per year. But we are cash poor and want to do some traveling. I know you recommend reverse mortgages. This doesn't seem like a good deal. Are we missing something?

A: The problem is you married a younger woman. You could qualify for a very generous reverse mortgage based on your age alone and the home's market value. But your young wife has a far longer life expectancy. Reverse mortgage lenders base eligibility on the age of the younger spouse who holds title. That's why the offered monthly lifetime $680 payment seems so low. The simple solution is for your wife to quitclaim her interest in the house to you. Then the reverse mortgage eligibility will be much higher, based on your age rather than hers.

Resource: Brought to you by Reverse Mortgage Guide and the Reverse Mortgage Blog.

Case Study: Reverse Mortgage Case Study - Long Term Care

Here is another good case study showing how reverse mortgages can be used for more than just supplimental retirement income. This case study illustrates how a reverse mortgage can help with long term care expenses.

Long Term Care Reverse Mortgage Case Study

A 65 year old couple is concerned that they have not saved enough money to cover long term care expenses and excessive medical costs. Their investment properties and pension provide a comfortable level of income today, but they are worried it may fall short in the future.

Their assets include a highly appreciated $2.2 million waterfront property with a detached rental cottage. If they sell the property outright they will lose $275,000 to capital gains taxes.
One solution is for them to take out a reverse mortgage against their property. They would recieve $800,000 line of credit from the reverse mortgage. They could then use part of the line of credit to purchase a SPIA (Single premium immediate annuity) and use the annuity payments to pay the monthly premiums on a long term care policy. The remaining portion of the reverse mortgage line of credit can be used to cover future medical expenses.

As the property appreciates in value of time, it's possible for the appreciation to far exceed the withdraws that are used to cover their future medical expenses. After 25 years (age 90 for the retirees) the balance on their reverse mortgage will be between $2 and 3$ million depending on the fequency and timing of their line of credit withdraws. If their home continues to appreciated at 6% over the same 25 years, it will grow in value to over $8.8 million.

This would provide their heirs with a significant estate at the same time providing the security and liquidity that the couple feels they need to pay for future health care and other expenses.

Resource box: For more information visit reverse annuity mortages or the reverse annuity mortgage blog.

General: Different Reverse Mortgage Options

There are many different reverse mortgage options: single purpose reverse mortgages, federally insured reverse mortgages, and proprietary (private sector) reverse mortgages. Each option has different pros and cons that need to be considered when looking into taken out a reverse mortgage. 

Single-Purpose Reverse Mortgages

A single purpose reverse mortgage is the lowest-cost type of reverse mortgages to obtain, but as the name indicates it can only be used for one specified purpose. They are typically offered by state or local government agencies. These loans a great for individuals who need cash for a specific purpose like paying property taxes or fixing up there homes. Here are descriptions for several different types of single purpose reverse mortgages:

• Property tax deferral (PTD) mortgages are reverse mortgages that provide loan advances for paying property taxes.
• Deferred payment loans (DPLs) are reverse mortgages providing lump sum disbursements for repairing or improving homes.

Federally Insured Reverse Mortgages

A federally insured reverse mortgage is the only reverse mortgage insured by the Federal Housing Administration (FHA). These reverse mortgage are one of the lowest-cost multipurpose reverse mortgages currently available. Overall they typically provide the largest total cash benefits of all the reverse mortgage options. The proceeds from a federally insured reverse mortgage can be used for any purpose. These loans are also known as Home Equity Conversion Mortgages (HECMs).

Proprietary Reverse Mortgages

A proprietary reverse mortgage is a mortgage product owned by a private company. These type of loans are more expensive then the other reverse mortgage types and should be approached with caution. Anyone looking into these type loans should get a comparison with a similiar HECM. One benefit of proprietary reverse mortgages are the higher home value limits. So, if you live in a home that is worth a lot more than the average home value in your county, a proprietary loan may give you greater loan advances than a Home Equity Conversion Mortgage (HECM).

As with any financial decision, you should get professional help to help you decide which option is best for your situation. Reverse mortgage counselors can help you evaluate each of your options and help you make an informed decision.

Resource box: For more information visit reverse annuity mortages or the reverse annuity mortgage blog.

General: Reverse Mortgages May be a Helpful Financial Tool

Here is an article from Market Watch that discusses reverse mortgage and discusses that it is not the right financial tool in all situations.Reverse mortgages may be a helpful financial tool for Americans 62 and older, although some readers will dispute that.

WASHINGTON (MarketWatch) -- Reverse mortgages may be a helpful financial tool for Americans 62 and older, although some readers will dispute that. But they aren't a way to keep you out of foreclosure. For that, you'll need different help.

Q. A couple of years ago, I lost my job of 14 years. Now I've used all my savings and retirement funds making my mortgage payments and find myself close to losing my house. It has been brought to my attention that you recently wrote about a reverse mortgage and I thought I should find out all I can about it as a way to save our home.Reverse mortgages can be a great tool for providing extra retirement funds, but it is not a tool that someone can use to get out of foreclosure.

Case Study: Reverse Mortgage for Estate Planning

Reverse mortgages can be used for more than just supplimental retirement income. The following is an example reverse mortgage scenerio that shows how reverse mortgages can be a powerful estate planning tool.