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.

General: Reverse Mortgage Disadvantages

Welcome to the reverse mortgage blog.

I will be bringing you fresh information, news, and articles on reverse mortgages issues. I am going to start this blog off with an article about some of the disadvantages/hazards of reverse mortgages and how you can avoid them.

Fraud: Example of an Unfair Lender

Here is a case where an unfair lender slid in some pretty nasty fees and conditions into a reverse mortgage. This example demonstrates the need to get quotes from several lenders and then go over the contract with a reverse mortgage counselor in order to understand the terms involved:

General: Are HUD Reverse Mortages Good for Retirement?

Here is another article about reverse mortgages. This one talks specifically about FHA insured HUD reverse mortgages and their benefits.

Resource: Reverse Mortgage Resources

Reverse mortgages are fairly complex and confusing beasts and tend not to be understood very well. So with a little digging I was able to find two great resources that will help you research and evaluate whether a reverse mortgage is right for your situation.

First off, wouldn't it be great to know approximately how much you can expect to get from borrowing a reverse mortgage. Wouldn't it also be great if you could get the value for three different options: lump sum payout, line of credit, or estimated monthly payments. Well I found a simple reverse mortgage calculator that will do all of this.

• AARP Reverse Mortgage Calculator

Another thing that you can do with this calculator is to figure up what the amount would be if you were to wait say 5 years to get your reverse mortgage. This will give you a quick comparison to decide if you should maybe wait before borrowing a reverse mortgage. Of course, this won't be completely accurate as the interest rate will fluctuate in the next 5 years.

Another good resource will provide you with a reverse mortgage counselor in your area.

• HUD Approved Reverse Mortgage Counselors

As stated in my previous posts, I highly recommend you talk with a mortgage counselor before you commit to a reverse mortgage program.

General: Reverse mortgages provide flexibility

This is an article I found that provides a good examples of an actual borrower that has used a reverse mortgage to give themselves more flexibility during her retirement years. Reverse Mortgages give Flexibility to Homeowners
By Nicholas Yulico - Staff Writer

OAKLAND - MARY WAGNER, 79, relies on a 1985 Toyota Camry to travel around the Bay Area, showing off her paintings. But for some time, the elderly artist feared major expenses if her car broke down. Her teacher’s pension and Social Security payments provide a modest income but don’t leave much room for error.

"What would happen if the Toyota gave up, and I wanted to move pieces to an exhibit? I’d be very upset," Wagner said. So a few weeks ago, Wagner joined the growing ranks of senior citizens signing up forreverse mortgages, which allow people to turn their homes into cash machines by pulling out the equity while still living in the dwellings.

Rather than a traditional mortgage, where you pay a lender each month, a reverse mortgage results in a lender sending you checks

People over 62 are eligible to borrow against the equity in their home to get tax-free income. No loan payments are due until the loan ends — typically when an elder sells the house or dies.

Money can come in lump-sum cash payments, regular monthly payments, a line of credit or a combination of these options. The loan amount is determined by a formula based on the borrower's age, the house's value and whether the person is single or married.

In Wagner's case, it allowed her to cash in on the appreciated value of her Oakland hills home while still living in it. She purchased the property in 1975 for $57,000, she said, and it is now appraised at $700,000.

Wagner was able to obtain a $239,000 reverse mortgage. She took a small lump-sum payment to pay off the remainder of her existing mortgage. She also also opted to receive $250 in monthly income and set up a $156,000 line of credit, which she can draw from when she needs cash.

"This now gives me the feeling that anything serious, I can handle," Wagner said.

Types of reverse mortgages

There are three main types of reverse mortgages, which carry different origination fees, rates and borrowing limits. However, they share several common features:

• Your age must be 62 years or older. The older you are, the more cash you can get. The more your home is worth, the more cash you can get.
• The interest is compounded.
• The loans are asset-based and don't require personal credit ratings or monthly payoffs, like home equity credit lines.
• You must pay off your existing home mortgage before getting a reverse mortgage; or you can use a lump-sum payment from the reverse mortgage to pay off the original loan.
• The mortgages are non-recourse loans, which means lenders can only look to a home's value for repayment. In other words, you never owe more than your home is worth when your loan is repaid.
• The income from the loan is non-taxableand doesn't affect Social Security benefits but could affect other public assistance benefits, such as Medicare, Medicaid/MediCal and Supplemental Security Income.

While some have criticized reverse mortgages for their high upfront fees, the products are increasing in popularity and can be good sources of income for the right candidates.FHA insured HECMs (Home Equity Conversion Mortgages) account for almost 95% of all reverse mortgages The Home Equity Conversion Mortgage (HECM), a reverse mortgage that is insured by the federal government, is the most popular product and accounts for about 95 percent of all reverse mortgages. From fiscal 2001 to 2004, HECMs increased 470 percent, said Jeff Taylor, a vice president with Wells Fargo Home Mortgage. The amount of HECMs issued in the Bay Area so far this year is double that of this time last year, he said.

"Business has been picking up fairly dramatically and has for the overall industry for the last two years," said Marty Appel, a loan consultant with Bay Area Reverse Mortgage.

Appel attributes the increase to dwindling stock portfolios of many seniors on fixed incomes.

Taylor, of Wells Fargo, said the No. 1 use of reverse mortgages is paying off an existing home mortgage. This, in turn, "creates new cash flow that is non-taxable," he said. Home remodeling is also often a big use of proceeds.

But while reverse mortgages have clear benefits, the product is not for everyone, experts say. Reverse mortgages are not something you want to for short terms of three or four years due to the large upfront fees. 

The Advantages of Reverse Mortgages

By Charles Kirkendall

In recent years property values have soared, while investment returns have been modest. This has created a situation where a lot of seniors are finding themselves in the position of being house rich and cash poor. These cash strapped seniors are looking for ways to increase their retirement income while continuing to live in their homes. These retirees find that their options are limited, and in most cases require them to risk their home. Enter the reverse mortgage, which can provide many advantages over these other less desirable options.

No Payments With Reverse Mortgages

The biggest advantage of a reverse mortgages is not having to make payments as long as you continue living in your home. In fact, this is the number one reason that seniors choose to borrow reverse mortgages. Almost 80% of reverse mortgage borrowers use a reverse mortgage to pay off their current loans in order to eliminate their house payments. Let's say you owe $50,000 on your first mortgage and borrow $80,000 with a reverse mortgage. This would pay off and eliminate the payment on the first mortgage and provide you with $30,000 to use as you please.

Live in Your Home as Long as You Like

The second advantage of reverse mortgages is the ability to live in your house as long as you like. The great thing about this is the amount you owe on the reverse mortgage can never be more than the house is worth. Let's say you live to 115 and have selected to recieve a $300 a month payments for life from the reverse mortgage. The amount received from the reverse mortgage payments could be substantially higher than the value of your home, yet the amount owed will still only be the value of the home. In this situation, FHA insurance will cover the difference.

Reverse Mortgage Withdrawal Options

Another advantage of reverse mortgages is the different withdrawal options that a you are able to choose. These options include lump sum distributions, line of credit, monthly payments, or any combination of these three. So if you were eligible to borrow $100,000 on a reverse mortgage you could select to receive $30,000 up front to cover current expenses, and hold the rest as a line of credit that you can use whenever you need it. This flexibility of reverse mortgages can significantly improve you financial independence during retirement.

Tax-Free Nature of Reverse Mortgages

Another advantage of reverse mortgage is the tax-free nature of the loan proceeds. The American Bar Association guide to reverse mortgages advises that generally the IRS does not consider loan advances to be income. This means that all the money from the proceeds of the reverse mortgage end up in your pocket.

With these features, reverse mortgage are definitely an option to consider if you are looking for ways to supplement your current income. As with any financial decision, you should seek the advice of a trained professional, a reverse mortgage counselor, to evaluate and determine if a reverse mortgage is right for your situation.

About the author: Charles Kirkendall writes articles on reverse mortages and other senior financial issues. Visit reverse mortgagesfor more information and resources.

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