Reverse mortgage scammers are financial con artists who prey on older people. The scammers abuse their standing as trusted advisors, lenders, family members, or professionals to exploit individuals in precarious financial situations.
Fraudsters convince folks to sign up for a reverse mortgage loan, which withdraws money from the equity in your home, to steal the proceeds, leaving the borrower with new debt on their home or no home at all.
While a reverse mortgage can be a good solution for some, it may not be the right financial solution for everyone. In this article, we will go through some common reverse mortgage scams so you can avoid them.
Key Takeaways
- Seniors may be targeted by scammers who convince them to take out reverse mortgages—loans designed for those with 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 television ads promoting reverse mortgages as a financial panacea for older homeowners. However, these products are complex and serious consideration should be given before getting a reverse mortgage.
Reverse mortgages are loans available to homeowners aged 62 or older who have sufficient equity in their homes. Reverse mortgages allow you to generate an income stream by tapping into the equity in your home. You can borrow that equity as cash in the form of a lump-sum amount, a credit line, or a series of monthly payments. Reverse mortgages can provide retirees with much-needed cash in retirement.
Unlike a regular mortgage, which you repay the loan through monthly payments, a reverse mortgage pays you. The mortgage lender who provides the homeowner with reverse mortgage payments uses the home as collateral. The balance of the reverse mortgage loan is due when the homeowner dies, moves out, 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 older people 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, but 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 loanor 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 a 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.
Flipping Fraud
In this reverse mortgage scam, scammers target seniors and get them to take out a reverse mortgage on their existing home in order to buy another property. Unfortunately, these homes are often distressed properties that have been 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 being taken to the cleaners.
Robbing Peter and (Not) Paying Paul
One way scammers target unsuspecting homeowners is to convince them to take out a reverse mortgage to help them bring their mortgage loans back into 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. 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 advertisem*nts 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 it 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, theHome Equity Conversion Mortgage, is insured by the Federal Housing Administration (FHA).
Are There Reverse Mortgage Scams?
Although reverse mortgages are a viable financial product, there have been scams involving financial advisors or contractors who suggest a reverse mortgage only to take the money or charge exorbitant fees that use up the funds. Other scammers suggest can't miss investments or buying properties with the funds, which don't exist, and the fraudster makes away with the money.
What Are the Risks of Reverse Mortgages?
Reverse mortgages are not free money, meaning you get charged interest and fees on the funds withdrawn from the equity in your home. You must also have enough money to pay your property taxes and homeowners' insurance; failing to do so is a leading cause of reverse mortgage foreclosure.
How Do I Avoid a Reverse Mortgage Scam?
Counseling is available from the Department of Housing and Urban Development (HUD). A HUD-certified housing counselor will speak to you in person for free, or you're charged a modest fee, depending on your income. From there, they will recommend a HUD mortgage lender to work with you in exploring a reverse mortgage.
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.
