How to Avoid a Reverse-Mortgage Scam
Deceptive ads and out-and-out fraud often lead to financial trouble
Reverse mortgages have become as much a staple of late-night TV advertising as amazing kitchen gizmos and miracle wrinkle creams. But while a kitchen gizmo or wrinkle cream that doesn’t perform as advertised might set you back $19.95* (*plus shipping and handling), a reverse mortgage could cost you your home.
High costs, real risks
Reverse mortgages allow homeowners over age 62 to borrow against the equity in their homes in return for monthly income, a line of credit or a lump-sum payment. They aren’t always a terrible deal. But even the best of them have some serious drawbacks that are worth weighing before considering one. Those include high interest rates, numerous fees and the possibility of losing your home if you’re unable to keep up with the insurance and taxes on it.
Sneaky TV ads
What’s more, the advertising for reverse mortgages is often confusing, incomplete or inaccurate, the federal Consumer Financial Protection Bureau (CFBB) recently charged. In a report taking the industry to task, the CFPB complained that the lenders’ ads frequently:
- Give homeowners the false impression that reverse mortgages are a free government benefit.
- Don’t make it clear that reverse mortgages are actually loans that will have to be paid back eventually. (Typically that’s when the homeowner dies, sells the home or leaves it permanently.)
- Bury the loans’ interest rates and fees in the fine print, if they mention them at all.
- Imply that a reverse mortgage will provide lifelong financial security, without mentioning that borrowers can exhaust their home equity or lose their homes to foreclosure.
At a news conference announcing the report, CFPB director Richard Cordray said the ads were of particular concern to his agency “because reverse mortgages are inherently complicated and because they are marketed to older homeowners who are known to be more vulnerable in many instances.”
Deceptive or borderline-deceptive TV commercials may not be the worst problem associated with reverse mortgages. Some of the sneaky sales practices used to market them are out-and-out scams, designed to defraud homeowners and steal any home equity they may have built up over the years.
According to the CFPB, the FBI and other sources, these are a few of the more common ones:
- Investment scams. The homeowner is persuaded to take out a reverse mortgage and put the proceeds into an annuity or other investment product. The investment may be inappropriate for the homeowner’s age, overpriced or simply bogus. Another twist: the homeowner may be told that he or she has to buy a particular investment product in order to qualify for a reverse mortgage.
- Home contractor frauds. Crooked contractors trick homeowners into signing up for reverse mortgages in order to finance home repairs, or homeowners are told they need to make expensive repairs in order to qualify for a reverse mortgage. The loans are sometimes represented as a no-cost government program to help people fix up their homes. The repairs may or may not ever happen.
- Identity (and equity) theft. In this scam, someone impersonates the homeowner, signs up for a home equity loan and pockets the proceeds. These thefts can be inside jobs perpetrated by unscrupulous relatives or caregivers, or they can be the work of total strangers. In some cases, the homeowner may have been tricked into signing a power of attorney, a legal document that gives someone the power to act on his or her behalf.
- Foreclosure rescue scams. People whose homes are in danger of foreclosure are told that a reverse mortgage can prevent that from happening. Through a convoluted series of transactions, they may instead end up signing away the home and losing all of their equity in it.
Related: Safest and Riskiest Mortgages
Other danger signs
The Federal National Mortgage Corporation, or Fannie Mae, says these are also signs of a possible scam:
- Reverse-mortgage offers that come unsolicited.
- Pressure to use a particular real-estate appraiser or home-renovation contractor.
- Efforts to isolate the homeowner and keep other family members from knowing what’s going on.
- Lenders that aren’t on the Department of Housing and Urban Development’s list of approved reverse-mortgage lenders.
To learn more about legitimate reverse mortgages, visit the Federal Housing Administration’s website for the details on its Home Equity Conversion Mortgage (HECM) program. The CFPB also has useful tips on reverse mortgages.