A Home Equity Conversion Mortgage (HECM) also known as a reverse mortgage loan, is available to homeowners who are 62 years and older and allows them to take part of their home’s equity and turn it into cash, monthly payments, or a line of credit.
It is important to be able to distinguish between a legitimate lender and a scammer with any financial product and to be aware of the commonly known reverse mortgage scams2:
Fraudulent Foreclosure
With the assistance of a dishonest appraiser, the scammer will overstate the value of the property and transfer the title into their name after the reverse mortgage is obtained, leaving the borrower without a home or funds from the reverse mortgage. Other scammers may work with a bogus institution that denies the reverse mortgage loan but proposes another type of loan. At the closing, the scammer will transfer the title away from the homeowners.
Equity Theft
These complex scams include multiple individuals who work to purchase a distressed property or a foreclosure, get an inflated appraisal, and enlist a senior to repurchase the property with a HECM for Purchase loan. The settlement attorney for the reverse mortgage is usually in on the scam and the individuals involved make off with funds from the reverse mortgage at settlement, leaving the senior empty-handed.
Free Homes
Seniors are recruited with advertising to live in a home then a reverse mortgage loan is obtained based on false or inflated appraised value. The scammers will take the reverse mortgage proceeds with the senior residing in the home who is then responsible for paying the property taxes and insurance. When the reverse mortgage loan becomes due the lender is stuck with a loss due to the lack of true value in the home.
Document Fraud
Seniors can be duped by official looking-letters regarding their loan and charging for copies of documents. Others can be charged thousands of dollars from letters requesting information about a reverse mortgage. Legitimate information about reverse mortgages is available for free from the Department of Housing and Urban Development (HUD).
How to Avoid Scams
The FBI has identified that seniors are one of the most frequently targeted groups for financial fraud. Unscrupulous professionals will try and take advantage of seniors by showing up at local churches and investment seminars, along with television, radio, billboard, and direct mail solicitations.3
Reverse mortgages can be a great financial solution for many, but it is recommended you do the following before signing an application:
- Research the Lender’s BBB rating and online reputation
- Confirm the Loan Originator’s License # on the Nationwide Multistate Licensing System & Registry (https://www.nmlsconsumeraccess.org/)
- Do not sign anything you do not understand
- Do not accept payment or money for a home you did not purchase
- Speak with a counselor of your choice that is certified by HUD
- Note: There is a mandatory counseling session with a HUD-approved counselor before you can move forward with a reverse mortgage. Anyone who does not allow you to speak with a counselor is not complying with HUD Requirements and should raise a red flag. (https://www.hud.gov/i_want_to/talk_to_a_housing_counselor)
Do Your Research
A reverse mortgage loan can be a valuable financial tool for seniors during retirement. As with any mortgage, consult with reputable professionals and do your research when choosing your lender.
Sources
1 https://www.ncoa.org/article/get-the-facts-on-elder-abuse
2 https://www.investopedia.com/financial-edge/0111/5-reverse-mortgage-scams.aspx
3 https://www.fbi.gov/scams-and-safety/common-scams-and-crimes/reverse-mortgage-scams