Many of us first heard about reverse mortgages as scams that took advantage of older and retired people, sometimes sending them into foreclosure and resulting in those victims losing their homes at particularly vulnerable periods in their lives. If you were watching afternoon tv in the 1990s and 2000s, you likely saw ads targeting retired folks touting reverse mortgages as the solution to any financial problem.
There’s a significant amount of money in most homes, and for those retirees who own their own, they may be able to use some of that money to fund home repairs or health care or that isn’t covered by insurance or Medicare and exceeds their savings. You can access that money, referred to as home equity, in essence, using your home as collateral for a loan or to qualify for other financial products.
Unfortunately, folks facing the challenge of not having enough cash for their retirement, including paying for health care that isn’t covered by their insurance and exceeds their means, are seen as targets by scammers and unscrupulous lenders. These bad actors know that, when you need a large amount of cash quickly, especially for something essential like healthcare, you’re more likely to rush through the process, or rely on people who work hard to gain your trust quickly but who don’t have your best interest in mind.
But not all reverse mortgages are scams, and while they’re not a financial product for everybody, there are certain circumstances in which a reverse mortgage is a very good, or even the best, option for accessing cash for essentials like healthcare. Later we’ll talk about why many reputable financial planners continue to recommend them to their clients.
First, let’s look at what a reverse mortgage is and then how to recognize fraudulent reverse mortgages being peddled by scammers.
What is a reverse mortgage?
Regardless of what any advertisement says, a reverse mortgage is a loan. The lender in a reverse mortgage loans you money in exchange for equity in your home. The proceeds of the loan can be paid to you as:
- A lump sum, the only option with a fixed interest rate
- Equal month payments (i.e., annuity or a tenure plan) for as long as a borrower lives in the home. A line of credit may be added to this option in the original loan agreement.
- Term payments, which are equal monthly payments for a set period of the borrower’s choosing, such as 10 years. A line of credit may be added to this option as well.
- A line of credit, in which the borrower can access the money available as needed, paying interest only on the funds actually borrowed.
Regardless of which option a borrower chooses, only 60% of the total loan proceeds, also known as the initial principal, is available in the first year of the loan. If the borrower moves out for more than 12 months, sells the home, or passes away, the loan becomes due; otherwise the loan is due at the end of the agreed-upon term of the loan. Until then, the borrower makes no loan payments, and the money the lender pays you is not taxable, as it’s not considered income by the IRS. Generally, the loan is paid off by the sale of the home.
In other words, in a reverse mortgage, as the lender pays you for the equity in your home, the loan balance goes up, and how much of your home you own (your equity in the home) goes down. It’s also essential to know that while you aren’t making payments on the loan, a borrower with a reverse mortgage remains responsible for property taxes, home insurance, repairs, and home maintenance during the life of the loan.
What does a reverse mortgage scam look like?
Reverse mortgage scams persist because they can be very lucrative for criminals, allowing them to rob older people of their savings or even their home.
The scam may begin with a direct mail advertisement or invitation to an “investment seminar” that promises to solve all your financial problems, often by magically providing “free” income, “tax-free” money, or allowing you to delay starting Social Security payments.
During the COVID pandemic, reverse mortgage direct mail advertising increased about four-fold compared to the prior five years. A report by the Consumer Financial Protection Bureau suggests that this advertising “focused on many older homeowners with high equity, lower incomes, and in regions where homeowners have somewhat less ability to stay current on their housing payments.”
Misleading reverse mortgage advertising
There are several federal laws designed to control how reverse mortgages are advertised, including the Mortgage Acts and Practices Advertising Rule (MAPs Rule), the Truth in Lending Act (TILA), and the Consumer Financial Protection Act of 2010. Nonetheless, predatory lenders and bad actors continue to peddle their wares.
In surveying nearly 100 reverse mortgage advertisements, the Consumer Financial Protection Bureau (CFPB) found that many of them “contained confusing, incomplete, and inaccurate statements regarding borrower requirements, government insurance, and borrower risks.” Furthermore, when they showed these advertisements, including direct mail solicitations and television ads, to their intended audience, homeowners over the age of 62, the CFPB discovered that “many consumers were confused or had misconceptions about important features and terms of reverse mortgage loans.”
These “misconceptions” included
- not understanding that reverse mortgages are, in fact, loans that must be repaid, including fees and compounding interest,
- believing that the federal government provides reverse mortgages or offers much broader consumer protection than it does, and
- believing that there was no way they could lose their home as a result of a reverse mortgage.
All of these beliefs are false. Reverse mortgages are indeed a loan, debt that must be repaid. The government does not offer reverse mortgages, although certain reverse mortgages (HECMs) are federally insured so that borrowers are never responsible for more than their house is actually worth. Borrowers can lose their homes or be forced out if they fall behind on property taxes or home insurance, or cannot pay when at the end of the loan’s term.
Many consumers believed the television ads to be “informational” rather than selling a product. The likelihood of taking the ads at face value increased with a celebrity spokesperson, like a former U.S. senator.
In 2016, the CFPB sanctioned three reverse mortgage lenders for deceptive advertising practices, including the largest reverse mortgage lender in the country, American Advisors Group, or AAG. American Advisors Group’s advertising, for example, “misrepresented that consumers could not lose their home and that they would have the right to stay in their home for the rest of their lives” and that “potential customers…would have no monthly payments and that with a reverse mortgage they would be able to pay off all debts.” The other two lenders made similar claims. Reverse Mortgage Solutions “misrepresented that a reverse mortgage could ‘eliminate debt’,” while Aegean Financial told consumers they “would not be subject to costs associated with refinancing a reverse mortgage” and in some Spanish-language advertisements, “falsely affiliated itself with the government.”
Finding a trustworthy reverse mortgage product
There are several situations in which a reverse mortgage can make a lot of sense, providing for the families needs and allowing them to retain their home. You can read more about how to determine if it’s the right product for you in our previous article by clicking here.
If you’re considering a reverse mortgage, or looking for a way to fund health care costs using home equity, let us help you better understand your options. We started this company to make sure we help protect people in vulnerable situations by vetting every financial company we use for estimates.
There’s no fee for speaking with a Wellahead concierge, who can talk you through the options so you can make the decision that’s best for your unique circumstances. No sales talk and no obligation; we’re simply here to help.