REVERSE MORTGAGE INFORMATION: Tools, News and Resources to Help Seniors Decide

We came across a truly useful book the other day: Scam Proof Your Life (377 Smart Ways to Protect You & your Family From Ripoffs, Bogus Deals & Other Consumer Headaches). The book is written by Sid Kirchheimer, “AARP’S Scam Alert Expert” and contains a wealth of practical tips and advice to use in protecting against all types of financial mischief from high-tech identity theft to avoiding used car sales scams.

Our initial interest in picking up the book was to see the advice offered for avoiding reverse mortgage scams. Given the authors AARP connection (even highlighted on the cover) we surely thought a chapter (at least a few pages) would be devoted to dangers in the fast-growing reverse mortgage sector. On this point we were disappointed. Not a word about reverse mortgages or reverse mortgage scams.

A chapter is devoted to “Homes”, but it deals mostly with home purchase mortgages and home improvements. Quite surprising that a book about consumer scams carrying the AARP logo on its cover does not mention reverse mortgages.

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We came across a recent forecast from Harvard University’s that projects the long-term outlook for the home remodeling industry. Here’s a summary of the key findings that are relevant to the reverse mortgage arena:

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In the past week we’ve seen on a couple of occasions snippets announcing a free downloadable reverse mortgage calculator to help seniors considering a reverse mortgage.

Initially, we were encouraged. Had someone really created a quality open source reverse mortgage calculator that could handle the complexities of reverse mortgages and provide reasonably accurate results? Such a tool could be quite a useful alternative for seniors (more…)

We noted in our last post the growing number of announcements of new, reduced-margin Home Equity Conversion Mortgages (HECMs). Just about every reverse mortgage lender around is touting a new HECM 100, HECM +100 or some variation thereof. These loans are the same as a standard Home Equity Conversion Mortgage (HECM) but charge borrowers a reduced rate of interest (1% over the one-year US Treasury rate instead of 1.50%). Clearly, welcome news for seniors thinking about becoming HECM mortgage borrowers.

But some of the announcements imply further borrower benefits: greater choice than ever before. , for example:

These enhancements will offer senior borrowers the option to compare 1.00, 1.25, and 1.50 margins on the monthly adjustable HECM and 2.60, 2.85, and 3.10 margins on the annually adjustable HECM.

“The new margins available represent an opportunity to provide greater options for senior borrowers. Seniors have a vast array of financial needs, and products such as these provide the options they require to fit their particular situation, says John Nixon, Executive Vice President and COO of Seattle Mortgage.

:

Sun West Mortgage Company, Inc., one of the leading innovators in the reverse mortgage industry, is proud to offer the HECM 100 and 125 to complement the traditional HECM150 product. These new HECM products allow Sun West’s broker partners to remain competitive as the secondary market for reverse mortgages becomes more efficient.

At first blush, this sounds great – more HECM options and lower costs to boot! But wait a minute. Something’s missing. What additional benefits does the borrower get for choosing a more expensive HECM 125 or HECM 150 loan? More upfront cash? Lower closing costs? A toaster?

Ummmm no. Quick calls to both Seattle and Sun West disclosed that there are no sound reasons for a borrower faced with the 3 options to select the HECM 125 or 150 products over the lowest margin HECM loan.

Probably lenders are keeping the higher margin HECMs around to use in rural markets and areas where they don’t face stiff competition (yet). But if maintaining these higher-margin products under the guise of “customer choice” has some short term benefits for lenders, it probably doesn’t help build longer-term public trust in reverse mortgage products. A recent survey found that “lack of trust of the product” was one of the primary reasons senior homeowners choose not to utilize reverse mortgages.

Another reverse mortgage scam has made news in California – this time in Tracy, CA. According to the :

Police arrested a local businessman Wednesday after he was accused of running a reverse mortgage scam on a Tracy couple.

Tracy police officer Kami Ysit said there could be more victims and more arrests from the 1½-month investigation of Michael Llamas, 22, of Mountain House.

On Wednesday morning, police served a search warrant on his business, Property Line Investments, 4600 S. Tracy Blvd., and arrested Llamas on suspicion of forgery, grand theft, financial elder abuse and conspiracy. He was released from San Joaquin County Jail in French Camp on bail of $63,000 on Wednesday.

Ysit said that a couple in their late 60s believed they had negotiated a reverse mortgage through Llamas but were dismayed to find out they had actually sold their house.

“They tried to resolve it with the suspect, but they couldn’t, Ysit said.

“It’s something people need to be aware of, she said. “It doesn’t appear the victims got copies of what they were signing, and they didn’t appear to be aware of what they were signing.

(emphasis added)

In this case, the perpetrator used a church relationship as a cover and to build a level of trust with the senior homeowner:

The couple’s daughter, who did not give her name, said her parents met Llamas through their church. She said they thought they were getting a five-year loan based on the equity of their home, valued at about $485,000.

They expected the loan would add up to about $100,000, the daughter said, and they started to get the monthly checks earlier this year.

“A month later, the neighbor said, ‘I’m sorry to hear you guys are moving,’ she said. That’s when they learned that their name was no longer on the title.

“I said, ‘I want my dad’s house back,’ and he said, ‘If you want the house back, you’ll have to buy it from me.’ Now we’re left to battle this to get the home back, she said.

She said the warning signs are clear, in hindsight.

“None of the paperwork was explained, she said, adding that her parents signed a stack of documents as they and Llamas discussed church and social matters.

“It was so casual. We were signing papers, right and left, and we weren’t aware of what we were signing, she said. “My father was under the impression that the house would come back to us.
(emphasis added)

The lessons are painfully obvious: 1) know what you’re signing and have present at any closing a competent, trustworthy advisor and, 2) do not allow a person’s association with a church or other “trusted” organization fool you into letting down your guard.

Here’s more information on reverse mortgage scams and the steps you can take to protect your interests.

The [tag]U.S. Department of Housing and Urban Development[/tag] ([tag]HUD[/tag]) – overseer of the popular HECM reverse mortgage program – recently released a new aimed at clarifying Home Equity Conversion Mortgage (HECM) counseling requirements.

In the letter (2006-25), HUD references some recently publicized cases of reverse [tag]mortgage fraud[/tag] and makes it clear it expects HECM counselors to take an active role in educating consumers about how to avoid [tag]reverse mortgage fraud[/tag] schemes.

Preventing Mortgage Fraud Against HECM Borrowers

It has come to HUDs attention that HECM borrowers are increasingly becoming targets of mortgage fraud scams. HUD has learned of a recent fraud scheme involving loan officers originating HECMs and arranging to keep the HECM borrowers loan proceeds. In one case the loan officer arranges for the title company to pay the loan proceeds through two checks. One check is sent to the senior and the other is kept by the loan officer. In another case loan officers are convincing seniors that a standard procedure in the HECM origination process is to sign over the loan proceeds to the loan officer for future disbursement to the HECM borrower. In these cases the loan officer may make a few payments but then keeps the balance of the funds. In an effort to warn HECM borrowers of these potential fraud schemes, HUD advises HECM counselors to discuss the potential of mortgage fraud with their clients. Counselors are to explain the standard ways in which HECM borrowers can access their loan proceeds. Counselors should warn clients against signing over their funds to loan officers or other parties involved in the mortgage transaction. While this type of fraud does not happen in the majority of HECM transactions, HUD believes it is important to educate prospective HECM borrowers about how to avoid becoming victims of fraud schemes (emphasis added).

We’ve previously written about some of the reverse mortgage fraud cases HUD references in Mortgagee Letter 2006-25 and recommend that borrowers educate themselves about these cases and the techniques being used by reverse mortgage scam artists.

[tag]Reverse annuity mortgage[/tag] is a phrase with dual meanings. Most users of the term are simply referring to a basic [tag]reverse mortgage[/tag]. One of the payment options available to reverse mortgage borrowers is the tenure payment option which acts very much like an [tag]annuity[/tag]. Under this option. homeowners receive fixed monthly payments – comparable to annuity payments – for as long as they live in the home, even until death.

Here’s a typical definition found at :

reverse-annuity mortgage

Definition
An arrangement in which a homeowner borrows against the equity in his/her home and receives regular monthly tax-free payments from the lender. also called reverse mortgage or home equity conversion mortgage.

But a second (and more precise) defintion of reverse annuity mortgage is found at :

reverse annuity mortgage – a reverse mortgage in which a lump sum is used to purchase an annuity that gives the borrower a monthly income for life.

This second use of the term refers to something much different than above. Under this scenario, the homeowner takes the reverse mortgage proceeds as a lump sum payment (as opposed to tenure payments) and purchases an insurance company annuity product.

Why would a homeowner buy an insurance annuity in lieu of taking tenure payments? There are two main reasons:

• First, monthly payments under an insurance company annuity continue for life, regardless of whether the homeowner stays in the home. Senior homeowners sometimes find they must sell due to health or other reasons, even though their intent when taking out a reverse mortgage was to remain in their home the rest of their lives.
• Second, many annuities can be invested in stocks and other assset categories that may produce higher monthly payments than available through a reverse mortgage.

On the other hand, monthly reverse mortgage payments will not be subject to federal income taxes whereas at least a portion of monthly annuity payments will be taxable.

So, is it a good idea to purchase an annuity product with reverse mortgage loan proceeds? It depends. Annuities are a complex financial instruments unto themselves. There are many variations – immediate annuities, deferred annuities, variable annuities, etc. – each with its own idiosyncracies and pitfalls for the unwary. In the right circumstances, a reverse annuity mortgage combination can be beneficial. But it will take a lot of homework and independent expert guidance to help a homeowner make the correct decision.

One thing that can be said with certainty is that it is never a smart idea to “bundle” a reverse mortgage transaction and annuity purchase together. A favorite tactic for reverse mortgage fraud artists has been to combine the two complex, hard-to-understand transactions in a manner that takes advantage of the senior homeowner. In some cases, abusive lenders have told seniors that the purchase of an annuity was a “requirement” for obtaining a reverse mortgage. After experiencing many such reverse annuity mortgage fraud cases, California recently enacted legislation specifically prohibiting this practice. Under the new law:

A reverse mortgage lender or a broker arranging a reverse mortgage loan shall not:

(1) Offer an annuity to the borrower prior to the closing of the reverse mortgage or before the expiration of the right of the borrower to rescind the reverse mortgage agreement.

(2) Refer the borrower to anyone for the purchase of an annuity prior to the closing of the reverse mortgage or before the expiration of the right of the borrower to rescind the reverse mortgage agreement.

Potential reverse mortgage borrowers in states other than California should follow this principal as well and strive keep the reversemortgage and annuity purchase decisions separate from one another.