Make Sure A Reverse Mortgage Is Right for You

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Reverse mortgages, which enable seniors to borrow money against their homes that won't get repaid until after they move out or die, can be useful tools.

But they aren't foolproof. These increasingly popular loans are also the subject of many consumer complaints.

Los Angeles resident Stephanie Hodal is a case in point. She was disgusted with a telemarketer who called her parents' house on a Sunday morning in early 2006. Hodal happened to be around to answer the phone.

In a friendly, patronizing and polite tone of voice, the telemarketer said she came from a government sponsored program called CFI that would enable seniors to turn the value in their properties into cash.

The telemarketer asked about the weather and how Hodal was feeling, as though she were an old friend calling instead of a salesperson. She said Hodal's parents had responded to a solicitation and made a request for further information about the reverse mortgage program, although Hodal isn't aware of them having done so.

When Hodal asked the telemarketer for detail about CFI, she got evasive answers.

Even after asking them to stop, she continued receiving many more calls from such telemarketers for months afterwards. Hodal finally filed a complaint that opened early this year to the Better Business Bureau, the Arlington, Va.-headquartered nonprofit.

"The heaviness of the spiel was just so suspect," Hodal says.

Luckily, her mother never fell for the pitch, but Hodal wondered about the susceptibility of other elderly people. "My objection was how they were marketing this in such a manipulative way."

In other cases, consumers have complained that reverse mortgage salespeople persuaded them to borrow money against their homes and put it toward other investments that didn't serve in the end.

Some scammers are so ambiguous about their origins, and work for companies that have gone through so many permutations and acquisitions, it can't be verified that their targets even know who or what the salespeople represent.

"We've seen an increase in inquiries" about reverse mortgage practices, says Bronwyn Belling, a reverse mortgage specialist with the AARP Foundation, a Washington, D.C.-based nonprofit that advocates for people 50 years and over. "We're monitoring this closely."

To be sure, lending industry advocates point out that most reverse mortgages aren't fraudulent. And the AARP Public Policy Institute published research in December showing that 93% of more than a thousand borrowers it surveyed in 2006 reported that their reverse mortgages have had a mostly positive effect on their lives.

"The problem isn't in the reverse mortgage deal," says Peter Bell, president of the trade group the National Reverse Mortgage Lenders Association. "It's in the swindling of people's money, which they happen to get through the reverse mortgage deal."

Nonetheless, problems with these loans have been taking place.

"In contact with our field divisions, we have seen an increase in complaints (such as suspicious activity reports) about fraudulent activity involving the reverse mortgage" area, says William Carter, a spokesman for the FBI in Washington, D.C. He couldn't provide statistics because the FBI doesn't yet have a separate classification for these kinds of mortgages.

"We're seeing activity, but we don't have the statistics to say it's a trend," Carter says.

The economy has changed in ways that could drive an increase in reverse mortgage fraud. The loans have been growing more popular as Baby Boomers look for ways to retire comfortably; 107,367 Home Equity Conversion Mortgage cases were endorsed for insurance from October to September 2007, compared to 76,282 in the comparable period of 2006 and only 157 in 1990, according to the U.S. Department of Housing and Urban Development.

Meanwhile, housing values have begun to fall in recent years, leading to a rise in mortgage fraud reports generally.

"All these people that used to work in predatory lending are looking for things to do," says Prescott Cole, senior staff attorney at the San Francisco consumer advocacy group California Advocates for Nursing Home Reform. Some are trying to make money now by pushing inappropriate reverse mortgages instead, he says.

In many of these cases, people are putting funds raised from reverse mortgages into problematic annuity investments.

For example, Los Angeles resident Mary Munoz was persuaded to borrow $209,282 by taking out a reverse mortgage from the Delaware corporation Financial Freedom in September 2004, when she was 76 years old. She then bought a deferred annuity with an initial premium payment of $60,000 that charged penalties for withdrawing money during the first 10 years, on the understanding that the investment would grow her assets and pay off the reverse mortgage after her death.

In August 2005, Financial Freedom required her to pay for home repairs under the reverse mortgage agreement, effectively forcing her to withdraw $26,592 from the annuity. Munoz filed a class action suit against Financial Freedom in November 2007, according to the documentation.

Financial Freedom, which is a unit of Indymac Bank, said in a statement that these allegations are "baseless and without merit." The lender declined to comment on Munoz's filing specifically, but pointed out that it does not sell, or partner with insurance representatives to sell, annuities to reverse mortgage borrowers.

In another example, Carol Anthony told the Senate Special Committee on Aging on Dec. 12 that her mother Betty bought a reverse mortgage in April 2006.

Although the 80-year-old woman had money in other accounts and had only drawn down $19,000 of her $150,000 home equity line of credit, she trusted a salesman who had been introduced to her by an 86-year-old friend. He made a number of promises, including that she would have no risk of losing her home or be rushed into signing anything she didn't understand.

Among other things, the woman ended up with a reverse mortgage that charged her many thousands of dollars in closing fees and required home repairs, compounding interest daily.

According to AARP, a 74-year-old borrower living in a $300,000 home could pay around $30,000 for a typical reverse mortgage, half in upfront fees and the rest from ongoing monthly ones for the life of the loan, and not including interest charges.

"It's really not the products that are so much the problem, but the appropriateness" of when people are being advised to use them, says Shawna Reeves Nourzaie, program coordinator at the Fair Lending Project for Seniors at the nonprofit Council on Aging Silicon Valley. "These are the loans of last resort."

Nourzaie recommends that anyone thinking about getting a reverse mortgage avoid problems later by getting good information first, for example from talking to a certified financial planner or tax advisor. You can also find an experienced counselor in your state here. AARP also has a Web site of tips and tools.

If you have any doubts about the fairness of your reverse mortgage, you can email AARP for help.

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