Half the households in America don't have any retirement savings. When the time comes to leave the workforce, they're then faced with difficult choices and depend solely on pensions that are often woefully inadequate.
Despite having good credit, senior homeowners frequently find themselves in financial binds, having to make sacrifices in their way of life simply because they're cash-strapped.
For most of them, their homes are their largest and most valuable asset.
REVERSE MORTGAGE REQUIREMENTS
Retirees and seniors whose accounts are somewhat short of long-term financial readiness can benefit from the considerable advantages of a reverse mortgage.
To qualify for a Home Equity Conversion Mortgage (HECM), backed by the Federal Housing Authority (FHA), they must:
- be at least 62 years old
- their home must be their primary residence and be fully or mostly paid off
- they must have enough financial resources to cover property fees such as taxes and insurance
THE VALUE OF A REVERSE MORTGAGE
HECMs allow homeowners to borrow money against the equity they've accumulated in their home, with payouts taking the form of either monthly cash advances, a line of credit, or a single lump sum.
Borrowers aren't required to pay anything (principal or interest) back unless they move, sell the property, or pass away; at which time the loan becomes due.
When this happens, after the lender fees are paid, any remaining equity goes to the homeowner or heirs, who also have the option of repaying the mortgage in lieu of selling the home.
As the reverse mortgage progresses, the debt increases in the same measure that the home equity decreases. If the homeowner gets to the point that more payments were received than the home was worth -- known as outliving the loan or "being underwater" -- the mortgage will never be more than the value of the home because of the FHA mortgage insurance built into the loan.
In this worst-case scenario, the home will be sold to help pay off the balance and the federal government will take care of any shortfall. Heirs or spouses will not be responsible for repaying the reverse mortgage.
As such, reputably financed HECMs, despite their generally undeserved bad reputation as swindles suitable only for the hopelessly naive, can be extremely helpful debt instruments for seniors looking for a way to enjoy their sunset years. They can assist older Americans by reducing expenses that could exhaust limited financial resources, while still allowing them to remain in their homes.
According to the U.S. Department of Health and Human Services, there's a 70% chance that people over the age of 65 will need some sort of long-term care, such as assisted living, home care, or skilled nursing.
Though there are many ways to help defray those costs, including Medicare, Medicaid, health insurance plans, long-term care insurance, life insurance, and annuities; these aren't always viable options for everybody.
A reverse mortgage can be helpful in these cases as well. Though they do require that the property being mortgaged remain the primary residence, even if the borrower's long-term care requires staying at a medical facility, when it's for a period shorter than twelve months, the mortgage won't become due.
PROBLEMS WITH REVERSE MORTGAGES
One of the most common concerns with a reverse mortgage is that it essentially eats into a homeowner's most profitable asset, leaving his or her heirs bereft of an inheritance, and having to repay the loan from their own pockets. While this may be true in some cases, most heirs who come into a reverse mortgage can usually pay off the loan by selling the home, depending on the equity balance on the property.
Another criticism has little to do with the product itself and more with how it's used. "Free" money, with seemingly no strings attached, has a tendency to encourage irresponsible behavior. This is one of the reasons that the FHA requires potential borrowers to attend a counseling session to discuss their options and learn about financial health before entering into a reverse mortgage contract.
Finally, it's important to note that reverse mortgages have also had a bad reputation due to overly aggressive sales tactics and some shady practices.
There are 2 categories of mortgage frauds:
- for profit
- for housing
In frauds for profit, industry experts, like banks, lenders, brokers, and lawyers, exploit the mortgage finance system for personal profit at the expense of unsuspecting homeowners.
This category is the most expansive and it’s highly scrutinized by the FBI. In fraud for housing, a borrower or an aid falsifies information to secure ownership of a particular house, typically done by withholding information about debt, or by inflating their personal income or a home’s appraisal value. These cases vary in severity, so depending on the situation (for example, if the infraction was accidental vs. constant fraud), lenders might ignore the transgression or decide to press charges.
Reverse mortgage fraud schemers prey upon a homeowner’s distress, so it’s important for consumers to keep a level mind and stay informed on the different types of schemes they might confront.
Typical reverse mortgage fraud schemes include:
- Flipping Fraud: This scam involves realtors convincing the elderly to obtain an HECM for purchase, in the interest of buying a lower-cost house without having to put any money down. Often, these properties are distressed and in poor condition, and the realtor finds a way to divert part of the mortgage funds into their own accounts while allowing the homeowner to believe they're getting housing through a Housing and Urban Development program.
- High-Pressure Sales Tactics: Some brokers target the most vulnerable elderly and pressure them into taking out a reverse mortgage they don't truly need. Taking a reverse mortgage without fully knowing all the ins and outs can lead to a home’s foreclosure, so it’s important to make this decision carefully.
- Delaying Social Security: Some lenders might convince seniors to take out a reverse mortgage at 62, the earliest required age, as a way to delay social security payments up to the maximum benefit age of 70. Lenders argue that delaying social security increases the monthly payment a senior receives once social security kicks in. However, taking a reverse mortgage too early can lead to loan funds running out sooner. If this happens, customers would have to rely on social security to pay for property taxes, homeowners’ insurance, and maintenance expenses, since these are requisites to prevent the loan from becoming due. Also, since reverse mortgage interests increase as years go by, the total loan amount owed at the end is always greater than the extra income added to social security.
- Leaving Out Spouses: This scam convinces senior citizens to name the oldest spouse as the sole borrower of the loan. The reason is that older borrowers receive a larger loan amount, and since spouses soliciting a reverse mortgage have to do so using the youngest age, leaving a spouse out would result in more cash for the couple. The problem is that this leaves the younger spouse unprotected in case the older borrower dies, since they can’t live in the home once the loan becomes due. The lender benefits from the shorter length of the loan, gaining the proceeds back quicker.
- FHA-Insured reverse mortgages can protect spouses in the case they’re not co-borrowers, but only when specific conditions are met.
- False or Misleading Advertisement: Another tactic is listing the mortgage as "free money," without fully disclosing all the fees, conditions, and risks. They may also fail to inform customers of the possibility of foreclosure, even going so far as to claim that a reverse mortgage means they'll never lose their home.
Other unscrupulous and predatory techniques for forcing people into reverse mortgages include:
- Contractor and Vendor Fraud: Home-improvement contractors or vendors target the elderly, selling them repairs or other services. When the mark expresses concern overpayment, the contractor or vendor suggests a reverse mortgage.
- Relatives, Caregivers or Financial Advisor Fraud: Some deceitful investment advisors recommend their senior clients use a reverse mortgage to finance unnecessary financial products, such as annuities, stocks, or whole life insurance. Family members or loved ones with a power of attorney have also been known to take out reverse mortgages in other people's name, even for deceased relatives.
How to Report Fraud
There are several agencies that help individuals report mortgage fraud.
The most direct way is to contact the Federal Bureau of Investigation (FBI) or the Federal Trade Commission (FTC).
The FBI investigates mortgage fraud through financial institution fraud (FIF) investigations, while the FTC protects citizens through their bureau of consumer protection, who investigate unjust and deceitful acts in the business world.
Concerned consumers can contact their local FBI office or submit an online report at https://tips.fbi.gov, and they can file a complaint with the FTC online through their technical support chat or through their complaint assistant.
Also, If the fraud involves the Housing and Urban Development Department (HUD), citizens can file a report online.
Another excellent resource is the Consumer Finance Protection Bureau since they provide a wide variety of useful tools for determining whether a bank, lender or other types of financial institution treat their customers fairly.
They offer both generalized information and specific guides and have a variety of ways to research companies. Their customer complaint forum is fully searchable, and the process to submit a complaint is simple and straightforward.
For seniors, the National Center of Elder Abuse (NCEA) is an excellent source for aid concerning senior financial exploitation, abuse, and neglect. The website provides various databases with the most up-to-date information concerning these topics, and they can be contacted online or by phone.
Another agency available to seniors is the US Senate Special Committee on Aging, which has been helping with fraud investigations since 1961. Consumers can report scams and receive information on scam prevention and recovery through their website or by phone.
CONSIDERING A REVERSE MORTGAGE
Even considering all this, elderly homeowners shouldn't be discouraged from obtaining a reverse mortgage just because of a few objectionable characters with questionable practices and ethics.
By following some simple, common-sense rules of thumb, seniors can avoid scams and frauds.
Namely, never sign anything you don't understand fully, always be wary of any person or organization that makes claims that sound too good to be true, and never respond to any sort of unsolicited advertisement.
Lastly, make sure to do your homework, and thoroughly investigate any company or lender before committing to anything.