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

California, the nation’s hot spot for reverse mortgages, has enacted legislation specifically aimed at [tag]reverse mortgage fraud[/tag].

According to the Contra Costa Times, Gov. Arnold Schwarzenegger signed into law SB1609 as summarized below:

Existing state and federal law regulate the activities of financial institutions. Existing state law defines and regulates reverse mortgage loans and provides a disclosure notice that a lender must provide an applicant, which informs the applicant that a reverse mortgage is a complex financial arrangement and advises the applicant of the wisdom of seeking financial counseling before entering the agreement.

This bill would prohibit a lender from requiring the purchase of an annuity as a condition of obtaining a reverse mortgage loan. The bill would prohibit a reverse mortgage lender or a broker arranging a reverse mortgage loan from offering an annuity to the borrower or referring the borrower to anyone for the purchase of an annuity prior to the closing of the loan or before the expiration of the borrower’s right to rescind. The bill would, among other things, require a lender to refer a prospective borrower to a housing counseling agency for counseling, as specified, prior to accepting a final and complete application for a reverse mortgage or assessing any fees, and would prohibit a lender from accepting a full and complete application for a reverse mortgage loan or assessing any fees without receiving certification, as specified, that the borrower had received this counseling. The bill would make changes to the disclosure notice provided to an applicant for a reverse mortgage and would require a lender to provide a specified list of independent loan counselors.

Existing law requires any person engaged in a trade or business who negotiates primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean in the course of entering into specified contracts to deliver to the other party, prior to the execution of a contract or agreement, a translation of it in the language in which it was negotiated.

This bill would include contracts for reverse mortgages within these provisions. The bill would require a lender to ensure compliance with these provisions in the case of brokered loans.

Impetus for the legislation came from Shirley Hochhausen, a Community Legal Services attorney in East Palo Alto, who had seen the devastation caused by reverse mortgage scammers to her clients.

Interestingly, the legislation was not not endorsed by the National Reverse Mortgage Lenders Association (NRMLA). According to testimony from NRMLA:

[tag]Reverse mortgages[/tag] offer an important choice and benefit to senior homeowners. Reverse mortgages do not give rise to the perceived abuses that Senate Bill 1609 is intended to address. The principal reverse mortgage product being offered in the United States today is comprehensively regulated by the federal regulations that authorize such loans. Other products adhere to similar safeguards. In that regard, abusive practices that might occur in connection with reverse mortgages have already been addressed by a comprehensive federal regulatory scheme and industry standards for best practices.

Hopefully the new legislation is more than window dressing and will provide seniors with real protection against fraud.

By all accounts, reverse home mortgage growth is set to explode. Baby boomers are reaching retirement and, for most, home equity makes up the largest part of their nest egg. [tag]Reverse mortgages[/tag] will be the tools that many of these retirees will use to tap into this nest egg for [tag]retirement living[/tag] expenses. The number of new [tag]HUD[/tag] [tag]Home Equity[/tag] Conversion Mortgages (HECM) already has increased sixty-five percent in the most recent twelve-month period (ended June 30, 2006) over the same period one year ago.

But along with reverse home mortgage growth come increased opportunities for fraud and scams. Reverse mortgages are different from traditional mortgages in ways that make them attractive vehicles for scam artists:

• reverse mortgages are products specifically designed for and targeted to senior citizens, the population group most vulnerable to fraud;
• [tag]scam[/tag] artists know that a reverse mortgages provide the senior homeowner with relatively easy access to a sizeable pool of cash; and,
• reverse mortgages are harder to understand than traditional mortgages making it easier for the scam artist to confuse and take advantage of victims.

In this article we look at some of the tactics scam artists are using and the precautions reverse mortgage borrowers can take to protect themselves.

Scam Tactic One Downplay Pre-Loan Counseling

An educated borrower is the scam artist’s worst enemy but it’s up to the borrower to educate themselves and take advantage of counseling and other opportunities to learn about reverse mortgages.

All three major reverse mortgage programs HUD HECM, [tag]Fannie Mae[/tag]‘s Home Keeper and [tag]Financial Freedom[/tag] require potential borrowers to have counseling with an independent counselor specially trained in reverse mortgages before taking out a loan.

In a recent Detroit-area [tag]fraud[/tag] case, a corrupt lender was able to keep the borrower in the dark about the amount she was eligible to borrow. She thought her loan would be for $61,000 when in fact she was borrowing $103,000. Guess who pocketed the $42,000 difference? A thorough counseling session would have given the homeowner an accurate idea of the true amount she was eligible for. Unfortunately for the victim, the prosecutor in the case says this never happened:

A counseling meeting explaining the reverse mortgage process was required by [tag]Financial Freedom[/tag] before the loan could be processed. Mr. James allegedly informed Ms. Schultz that he would be able to waive the counseling meeting by just asking a few questions over the phone.

Precaution: Although counseling by telephone is allowed, it is always best to meet face-to-face with the counselor. If you find that anyone you’re working with in the process suggests that counseling can be done quickly over the phone or otherwise downplays the importance of pre-loan counseling, be highly suspicious.

Scam Tactic Two Forgery

[tag]Forgery[/tag] is a key part of many scams. In the Detroit case cited above, the lender requested the title company to prepare two checks payable to the homeowner: one for $61,000 which the homeowner received and a second one for $42,000 which the corrupt lender endorsed with a forged signature and deposited into his own account.

In one California case, two con artists one working as a financial advisor the other a handyman – convinced an elderly homeowner to take out a reverse mortgage to pay for home repairs. The financial advisor opened an account for the proceeds of the loan and forged the victim’s name to gain access to funds.

Another California case reported in the Santa Cruz Sentinel shows how dangerous it can be to sign “unfinished” documents:

Mrs. Sally Scott is 66 years old. While she receives Social Security and pension checks, she still can’t make ends meet. She saw an ad for a “reverse” mortgage a loan that allows seniors age 62 or older to receive cash by borrowing against their homes and does not require repayment as long as they live there. Seeking a little financial cushion, she spoke to a mortgage broker about a $10,000 reverse mortgage.

When she received the loan papers, she noticed that the loan amount was $200,000. The broker promised that he’d change the figure, but insisted that she sign the paperwork first. Trusting the broker, Mrs. Scott signed.

A week later, she received a check for $200,000. She immediately notified the broker, who apologized for the mistake and instructed her to wire the money back. As it turned out, the account that Mrs. Scott returned the money to belonged to the broker. He disappeared, leaving her with a mortgage in default and no way to repay the loan.

Precaution: Never sign documents with blanks to be filled in or corrections to be made later. Carefully protect access to your checking and other accounts. Review and reconcile checking account and loan statements regularly. If you find something awry, contact your financial institution immediately.

In the Detroit case cited above, the victim caught on to the scam when she received a loan statement indicating the balance of her reverse mortgage (including interest) totaled $131,000.

Also, take advantage of the free credit reports available to you under federal law. Reviewing your credit report each year is also a good way to catch unauthorized financial activities under your name.

Scam Tactic Three – Charging for Free Reverse Mortgage Information

The complexity of reverse mortgages means that it is natural for borrowers to seek assistance and guidance to help them understand the loan process, find a lender or, generally, better understand what they are getting into. Some scammers have seized on this to offer – for a fee – reverse mortgage information and services that are available to consumers at no charge.

For example, some senior homeowners have been contacted by firms offering to assist them in finding a reverse mortgage lender, in exchange for a percentage of the loan. This type of arrangement should always be avoided. According to HUD’s website:

HUD does NOT recommend using an estate planning service, or any service that charges a fee just for referring a borrower to a lender! HUD provides this information without cost, and HUD-approved housing counseling agencies are available for free, or at minimal cost, to provide information, counseling, and free referral to a list of HUD-approved lenders. Call 1-800-569-4287, toll-free, for the name and location of a HUD-approved housing counseling agency near you.

Precaution: Walk away from anyone who offers to find a reverse mortgage lender for a fee. Use the internet to find free information about reverse mortgages or, read one of the several excellent reverse mortgage books that have been published in recent years.

If you feel you have need for a professional financial planner to assess your overall situation – including the reverse mortgage decision – find a [tag]certified financial planner[/tag] (CFP) who works on a fee-only basis and who is knowledgeable of reverse mortgages (many aren’t).

Scam Tactic Four – Posing as a Government or Non-Profit Representative

The most popular form of reverse mortgage – the Home Equity Conversion Mortgage (HECM) – is an official program of the U.S. Department of Housing and Urban Development (HUD). However, neither the HECM program nor other reverse mortgage programs are marketed directly to senior homeowners by government employees.

Unscrupulous reverse mortgage salesmen have been known to represent themselves to elderly homeowners as government representatives or volunteers for non-profit organizations.

Precaution: Be sure you know who you are dealing with and what organization they represent. Do not be timid about asking for information such as their home office location and phone number. Use resources like HUD and the [tag]National Reverse Mortgage Lenders Association[/tag] ([tag]NRMLA[/tag]) to check out the company. Also, check complaint sites like www.ripoffreport.com or bbb.com.

Scam Tactic Five – Bundling Things with Reverse Mortgage Financing

Smart consumers know that the best way to shop for a car is to separate the parts of the transaction – purchase, financing and trade-in – from each another. With a bundled transaction, it’s easy for the consumer to be befuddled and not understand the true cost of the overall deal. What appears to be a “great price” on the car may mask exorbitant finance charges or a low trade-in value.

Similarly, a common tactic of scam artists is to bundle reverse mortgage financing with something else such as home improvements, annuities, risky investments, living trusts or other estate planning products.

In one Seattle-area case, elderly consumers were told that living trusts must be purchased in order to obtain a reverse mortgage. In another case, seniors were encouraged to take out a reverse mortgage and use the proceeds to “invest” in truck-mounted billboards.

Frequently, two or more scammers work as a team. For example, in the California case cited earlier, an unscrupulous financial advisor steered the homeowner to a home repair contractor who was party to the scam and who grossly overcharged the victim for repair work.

If you find yourself dealing with someone who attempts to bundle a reverse mortgage with another product or service or steer you to a particular contractor/lender, be highly suspicious. If you feel at all uncomfortable or that the person is using high-pressure sales tactics, walk away.

Precaution: When home improvements or estate planning services are needed, shop for the best deal. It’s best for you to find what you’re looking for rather than them finding you. Homeowners should avoid doing business with anyone who comes uninvited to the door, makes an unsolicited phone call or whose name is found randomly on a flier.

When you’ve found the best deal, then weigh your financing options – including a reverse mortgage. Keeping these decisions separate will protect you from possible fraud and help ensure you get the most for your money.

We’ve posted previously about the fact that some people were confusing the terms “[tag]inverse mortgage[/tag]” and “[tag]reverse mortgage[/tag]“. We noted that the company promoting inverse mortgages, [tag]Brixdale[/tag], did not appear to have an active website and that most of the discussion on the web about inverse mortgages revolved around whether it was a legitimate financial product or a [tag]scam[/tag].

We came across a press release from the New York state Attorney General’s Office which provides the definitive answer:

Attorney General Eliot Spitzer today announced a consent judgment against a Long Island-based web site operator and his associates who ran a string of fraudulent internet operations.

Following the filing of a lawsuit by Spitzer’s office in September 2005, Jeffrey Augugliaro of Malverne was ordered to immediately pay over $200,000 to consumers who were victimized by a mortgage payment scam he perpetrated through his business, Brixdale, Inc. The judgement entered in State Supreme Court in Mineola required him to pay additional restitution of over $700,000 to affected Brixdale consumers and to make a payment of $100,000 to a charitable organization designated by the court, with the advice of the Attorney General, that serves the stated objectives of a purported charity through which Agugliaro conducted a separate fraudulent solicitation scam.

The Court has designated that the $100,000 be distributed to the American Cancer Society, whose mission is consistent with the purported purposes of the organizations, namely cancer prevention, treatment and service. In addition, evidence suggested numerous consumers who donated money to the defendants’ fake charity thought they were donating to the American Cancer Socirty.

The judgment also requires Augugliaro to shut down all his businesses and websites, permanently bars him from operating any further internet operations, and unless a $100,000 performance bond is posted, bars him from operating any type of consumer business in New York state.

Using the website, brixdale.com, Augugliaro promised consumers that by allowing him to take control of the electronic transfers of their monthly mortgage payments, consumers could not only pay off an entire 30-year mortgage in full, but could also easily make a quarter of a million dollars, all in a matter of months. Nationwide, about 3,000 consumers signed up.

The lawsuit alleged that the Brixdale scam was an [tag]illegal pyramid scheme[/tag], whereby consumers were encouraged to recruit others to sign up. Those new members, in turn, had to recruit new members to perpetuate the scheme. Consumers were lured into making “extra” mortgage payments, but rather than making the mortgage payments as promised, Augugliaro siphoned off some of the funds himself and to pay commissions to others. As a result, hundreds of thousands of consumers’ dollars were drained from the Brixdale account.

As stressed in the prior post, inverse mortgages have nothing to do with legitimate reverse mortgages and the two should not be confused. With the downfall of Brixdale, perhaps the term “inverse mortgage” should be retired.

The following press release from the Wayne County, Michigan Office of the Prosecuting Attorney provides further details to the [tag]Michigan reverse mortgage[/tag] scam we posted about previously:

Prosecutor Worthy Charges in Connection with [tag]Reverse Mortgage[/tag] [tag]Fraud[/tag] Scheme

Prosecutor Kym L. Worthy charged Anthony James, 43, of Romulus, Michigan in connection with a reverse mortgage fraud scheme that involved Shirley Schultz, 84, of Belleville, Michigan.

In November of 2003, Ms. Schultz contacted one of the largest mortgage lenders in the United States, Financial Freedom Senior Funding Corporation located in San Francisco, California after seeing a television commercial. She called a 1-800 number and was directed to Mr. James of Park Place Mortgage Company located at 9340 South Wayne Road in Romulus, Michigan. Mr. James allegedly informed Ms. Schultz that he would come to her home to process the required paperwork and that this was a service provided to senior citizens. Ms. Schultz met with Mr. James numerous times over the next 12 months.

A counseling meeting explaining the reverse mortgage process was required by Financial Freedom before the loan could be processed. Mr. James allegedly informed Ms. Schultz that he would be able to waive the counseling meeting by just asking a few questions over the phone.

Tri-County Title Insurance Company was the closing agent who processed the title work for Mr. James. They were allegedly directed by Mr. James to issue two checks at the closing. The two checks were both payable to Ms. Schultz. One check was in the amount of $61,325.79 and the second check was in the amount of $42,667.11 also payable to Ms. Schultz.

In January 2004, Ms. Schultz received the check for $61,325.79. She was expecting to receive approximately $62,000 at the closing and was allegedly informed by Mr. James that the balance would be placed in an account that she could draw upon as needed. It was not until Financial Freedom started sending her monthly statements for an amount owed of $131,000 that she realized something was wrong. When Ms. Schultz contacted Financial Freedom she was advised that she borrowed approximately $103,992.90 including 6% interest which totaled approximately $131,000.

Shortly thereafter, Ms. Schultz discovered that there was a second check for $42,667.11 that she never received with a forged endorsement in her name along with the signature of Anthony James. The check was deposited in a bank account belonging to Anthony James. Ms. Schultz retained an attorney to assist her and the Sumpter Township Police were contacted and investigated the case.

As a result of the investigation by Officer Danielle Buccellato, the Wayne County Prosecutor’s Elder Abuse Unit was able to charge Mr. James with Uttering and Publishing, an offense with a maximum penalty of 14 years in connection with presenting and cashing the $42,667.11 check. He was also charged with Larceny by Conversion of $20,000 or more, which has a maximum penalty of 10 years for taking the $42,667.11 check and fraudulently converting it to his own use.

Financial Freedom Senior Funding Corporation defines a reverse mortgage as: A way to enable senior home owners, age 62 or older to convert part of the equity in their home to tax free income without having to sell the home, giving up title or taking on a new monthly mortgage payment. Borrowers should never under any circumstances resulting from the reverse mortgage be forced to leave their homes provided they make their real estate property tax and insurance payments.

Borrowers can choose to receive the funds as a lump sum, line of credit, or any combination of these options. They can use the funds in any way they wish and make no monthly payment on a reverse mortgage during the life of the loan. The loan is repayable when the borrower sells the home or permanently
moves out. In addition the repayment amount cannot exceed the value of the home.

Reverse mortgages are insured by the Federal Housing Administration, an arm of the Department of Housing and Urban Development. The predominate reverse mortgage product in the market place is the Home Equity Conversion Mortgage (HECM).

Financial Freedom Senior Funding Chief Executive Officer James Mahoney said, We are outraged but very grateful that we could assist in this effort to bring Mr. James to justice and protect our senior customers. We will continue to vigorously provide whatever assistance we can.

Prosecutor Worthy said, We want to thank Financial Freedom for their cooperation in our investigation. This is a despicable act of one of the lowest forms of criminals, one who will prey upon our senior citizens. By taking this money and engaging in fraud Mr. James literally tried to steal one of the most valuable assets that Ms. Schultz has away from her. We want to make sure that senior citizens are aware that they must be very careful with their financial transactions. Predators are everywhere and we must do a better job of educating the public to be circumspect in these matters.

An arraignment was held at 34th District Court before Judge Brian Oakley this morning and received a $1,000,000 cash or surety bond. His preliminary exam is scheduled for June 28, 2006. Please call Sumpter Township Police Department at (734) 461-4833 for a mug shot of Mr. James.

If you know of a senior citizen who has experienced financial exploitation in connection with a reverse mortgage please call the Elder Abuse Unit of the Wayne County Prosecutor’s Office at (313) 224-6304 or (313) 224-0585.

In the earlier post, we wondered if pre-loan counseling had been so inadequate that the homeowner didn’t have a clue as to the amount they were eligible to borrow. From the prosecutor’s press release, it’s painfully obvious this was the case.

Reverse mortgage counseling should be viewed by the borrower as an essential protection not a nuisance. If a reverse mortgage lender (or anyone else involved) suggests that counseling can somehow be short-circuited for convenience sake, look elsewhere.

Counseling protects not only against scam artists like Anthony James, but also from entering into this complex financial transaction without fully understanding it. It’s unfortunate that it is possible to so easily paper over what is supposed to be an essential part of the reverse mortgage loan process.

The Detroit News has reported on a [tag]Michigan reverse mortgage[/tag] scam incident that prosecutors say may be just the “tip of the iceberg”. Indications are that the scam may have reached dozens of senior citizens with more than $1 million being stolen.

A Romulus loan officer has been charged with bilking a Belleville woman out of $42,000 in a mortgage fraud scheme that he may have used to dupe dozens of other elderly homeowners at a loss of more than $1 million, authorities said Wednesday.

Anthony Darryl James, 43, is scheduled to be arraigned today in 34th District Court in Belleville on two felony charges stemming from a $103,000 loan he obtained for 84-year-old Shirley Schultz. Wayne County Prosecutor Kym Worthy said Schultz thought the loan was for $61,000 and didn’t know that James had secretly kept a $42,000 check for himself.

Schultz later learned the full amount when she started receiving bills for a loan that, with interest, totaled $131,000, Worthy said.

“We feel this is just the tip of the iceberg,” Worthy said, referring to the ongoing investigation against James. “This is a far-reaching scam.”

Worthy said James is suspected of defrauding senior citizens in Wayne and Oakland counties.

Reverse mortgages are legal, tax-free loans or credit lines homeowners can take against the equity they have in their properties. They are often used by the elderly, who frequently own their houses outright.

The loans can be repaid by heirs or from the proceeds of a property sale, making them even more attractive to seniors looking for additional income.

In November 2003, Schultz contacted Financial Freedom Senior Funding Corp. of San Francisco, seeking a reverse mortgage.

The company referred her to James, who was working for Park Place Mortgage Corp. of Livonia at the time.

Paul Verkerke, vice president at Park Place, said James left the company a year ago.

“We had no participation in his alleged activities,” he said, declining to comment further. “We’re going to have to let this run its legal course.”

James allegedly forged Schultz’s signature on the $42,000 check and deposited it into an account he controlled.

Financial Freedom has pledged to cooperate in the investigation.

The fraud claim James now faces is similar to earlier complaints against him. James has been sued at least twice by customers who said he cheated them on reverse mortgages he negotiated for them. Both cases were dismissed.

Romulus lawyer Steven P. Robinson, who has represented James before, declined to discuss the allegations or his previous cases. “I’m not in a position to comment at this point,” he said.

Inkster resident Willie Collins sued in 2004, saying James and his mother, Dorothy James, kept $38,000 in a pair of reverse mortgages gone wrong.

In one of them, Anderson Hughes began seeking a reverse mortgage from James in early 1999, according to court records. After Hughes died, Dorothy James put her name on his property deed, Collins claimed.

In a 2003 lawsuit, Annette Lewis of Detroit claimed she was evicted from her home after James kept more than $17,000 she obtained in a 2001 reverse mortgage loan.

James is charged with uttering and publishing, a 14-year felony, and with larceny, which carries up to 10 years. Worthy urged anyone with information or concerns about similar mortgage fraud to contact her office at (313) 224-6304 or (313) 224-0585.

Further details about this case are yet to emerge. But at this point, few things stand out:

• Anthony Darryl James, who is charged, apparently has a track record of similar misdeeds going back to as early as 1999. Yet in 2003, [tag]Financial Freedom[/tag] Senior Funding – the largest [tag]reverse mortgage[/tag] lender in the country – still was recommending James’ services to Detroit-area seniors. It seems a little more diligent background-checking might be called for.
• As noted in the story, “James allegedly forged Schultz’s signature on the $42,000 check and deposited it into an account he controlled.” This is similar to another reverse mortgage scam in the Sacramento, CA area a few months prior. Apparently, opportunities for [tag]forgery[/tag] are ripe, and seniors should be especially vigilant about protecting their checkbooks and not signing documents with blanks to be filled in later.
• The fraud apparently involved duping the homeowner into thinking the loan was for only 59% of its actual amount. What kind of loan closing process would allow this to occur? Was pre-loan counseling so inadequate that the homeowner didn’t have a clue as to the eligible loan amount? Obviously many questions about practices and procedures will be raised by this case.

Thanks to The Real Estate Bloggers, for bringing this story to our attention.

We received a question recently asking about “[tag]inverse mortgages[/tag]” and how they differ from “[tag]reverse mortgages[/tag]“.

At the outset lets be clear: [tag]inverse mortgages[/tag] and [tag]reverse mortgages[/tag] have no connection with each other.

The inverse mortgage is not really a type of residential mortgage at all. Rather, it is a multi-level marketing strategy put forth by a company called Brixdale that involves combining bi-weekly mortgage payments with referral marketing. (Last I checked, the Brixdale company website wasn’t working.)

Top results from a Google-search for the term “inverse mortgage” are mostly discussions of whether the idea is legitimate or a scam.

Rather than get into a lengthy discussion of what an inverse mortgage is, I’ll refer you to this excellent summary at MortgageNewsDaily.

But please do not confuse inverse mortgages with legitimate reverse mortgages.

We previously published a post concerning an article wriiten by [tag]Kenneth Harney[/tag] of the Washington Post and the angry response it drew from the [tag]National Reverse Mortgage Lenders Association[/tag] (NRMLA). Following is Harney’s counter-response to the NRMLA as published in the San Francisco Chronicle:

Kenneth Harney responds:

The problem with this critique is that it erroneously suggests that my column “seriously misinforms” readers.

The column did not attack [tag]reverse mortgages[/tag], but factually reported one of many situations out there — I call them ticking time bombs — involving equity-share reverse mortgages written in the 1980s and 1990s, where lenders insist on full collection of equity, no matter what the circumstances.

Substantial numbers of these equity-grab loans originated in California. In Katherine Stephens’ case, all she wanted was a little money out of the sale proceeds of her house to pay her nursing home bills. But the lender adamantly refused — unsatisfied with an 11.5 percent interest rate compounded over 18 years. (Remember, Stephens only received $67,586 from the lender; the lender now insists on collecting half a million dollars from her.)

In the column I did mention that the industry abandoned active promotion of these loans. I didn’t mention why: Class-action lawsuits and settlements in California and elsewhere; criticism from AARP; and yes, negative publicity.

The industry is embarrassed by its own behavior and wants to hide information about aggrieved customers like Stephens.

Bell, chief lobbyist for the reverse mortgage industry, wants only sugar-coated news coverage. But the reality is that Bell and the industry cannot challenge the facts — and they have not.

Here’s an interesting discussion thread on this issue.