Reverse Mortgage Scammers on the Loose

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Uh-oh, you knew this was coming.

With more and more seniors looking into the reverse mortgage market, a new report warns that some of the most notorious players in the sub-prime world have moved over to the reverse mortgage market — and are setting up shop. Here’s what to look for so you don’t get fleeced.

First, what is a reverse mortgage? Essentially, it’s a loan on home equity, where a lender makes regular tax-free payments to the homeowner for life. In return, the lender takes ownership of the property after the homeowner’s death, or when the homeowner sells the home.

At face value, reverse mortgages can be attractive. For example, homeowners can opt to receive their cash via fixed monthly payment, lump sum or by line of credit. Plus, there is no income requirement and homeowners still retain the titles to their homes.

On the downside, reverse mortgages could impact a homeowner’s Medicaid eligibility, and can generate ample origination and management fees that must be paid by the homeowner. In addition, like most loans, reverse mortgages charge interest, which can increase debt loads over time. More so, the deeper into a reverse mortgage you go, the less money you’ll have to leave to your heirs.

No matter what the pros and cons, it’s full-speed ahead for reverse mortgage marketers. The report, which comes from the National Consumer Law Center, contends that reverse mortgage outfits are getting more aggressive and growing more emboldened as they target seniors and their hard-won home equity.

The report, titled Subprime Revisited: How the Rise of the Reverse Mortgage Lending Industry Puts Older Homeowners at Risk says that annual reverse mortgage volume has exceeded 110,000 U.S. homes, with a total value of about $17 billion. A slew of big banks are involved in the reverse mortgage market, including mainstays like Wells Fargo (stock quote: WFC) and Bank of America (Stock Quote: BAC). Big insurance companies, like Metlife (Stock Quote: MET), are treading into the marketplace, as well.

The NCLC isn’t shy about pointing fingers at big financial institutions, noting that reverse mortgage campaigns are slick, well-funded efforts that could gloss over the ramifications of entering into a reverse mortgage agreement. The report also cites “perverse incentives” to financial services brokers who are on the front lines in reaching out to seniors and extolling the virtues of a reverse mortgage.

This from the report: “Many of the same players that fueled the subprime mortgage boom — ultimately with disastrous consequences — have turned their attention to the reverse market. Lenders, including some of the nation’s largest banks, view that market as a source of profits that have dried up elsewhere. Mortgage brokers see it as a new source of rich fees. Predators who once reaped profits from exotic loans have now focused on wresting more wealth from vulnerable seniors. And securitization, which allowed subprime loan originators to disassociate themselves from the downside risks of abusive lending, is becoming commonplace in the reverse mortgage industry.”

The report, which notes there are no FDIC insurance, nor significant federal regulations protecting consumers from reverse mortgages, urges stronger federal bulwarks against unscrupulous companies and calls for a “suitability” standard that reverse mortgage marketers must adhere to. Counseling services to unwary seniors are also urged. Financial watchdogs have long held that companies which pry open seniors' home equity via reverse mortgages unfairly profit by getting homeowners to buy high-commission annuities or unnecessary insurance policies.

Those are all good reasons why the NCLC report is worth reviewing. Download it here and read the whole thing. The home you save may be your parent’s or grandparents or maybe even your own.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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