A Free Public Service

SCAMS BULLETIN Host Jay White is an inactive attorney in San Mateo County, California.

October 5, 2021

REVERSE MORTGAGE SCAM

Courtesy AARP

A reverse mortgage is a type of loan that’s designed to give people access to the equity they’ve built up in their home — basically, the property’s current value minus any outstanding loans or liens — without having to sell it. The borrower gets what is, in effect, a tax-free advance on their equity, in the form of a line of credit, fixed monthly payments or a lump sum.

For most reverse mortgages, the proceeds must be used to pay off any existing mortgage; the remainder of the loan comes due when the owner moves, sells the house or dies. 

For some older homeowners, a reverse mortgage can be a way to supplement retirement income, consolidate debts or cover expenses like health care. For scam artists, they can be a lucrative tool to fleece people who are age 62 and over out of large sums of money, or even their homes.

Reverse mortgages are complex, and they can be risky. Fraudsters take advantage of that complexity to draw older homeowners into bad or outright bogus deals. Marketing may be in ads and “investment seminars” as a cure-all for financial worries in golden years, providing “free” income or a means to delay filing for Social Security.

It’s often a group effort, with unscrupulous mortgage brokers or financial advisers joining forces with corrupt appraisers, attorneys and loan officers. They’ll finagle an inflated appraisal of a home’s value, thus inflating the equity and the potential loan, and try to persuade the owner to take out a reverse mortgage.

The fraudsters might try to sell a victim on a supposedly can’t-miss investment or financial product. They may charge fees running into the thousands of dollars to provide information about reverse mortgages that’s available for free from the U.S. Department of Housing and Urban Development (HUD).

Warning Signs:

*A broker or lender uses high-pressure tactics to try to talk you into a reverse mortgage.

*They claim the loan is safe because it’s insured by the Federal Housing Administration (FHA). The FHA does insure some reverse mortgages, but that coverage doesn’t protect the borrower; it’s for the lender, in case of default.

*They don’t disclose the fees, conditions and risks that come with taking out a reverse mortgage, including the possible loss of the home, which serves as collateral.

Do’s:

*Do get information on reverse mortgages from reputable sources, such as HUD or the Federal Trade Commission.

*Do talk to a trusted financial adviser or attorney before you sign anything. If the reverse mortgage is a federally insured Home Equity Conversion Mortgage (HECM), as most are, you are required by law to meet with a government-approved counselor before signing.

*Do be wary if someone selling home improvement services suggests taking out a reverse mortgage to pay for renovations or repairs.

*Do be suspicious of claims that a reverse mortgage will get you free income or a free home.

*Do know that you usually have the right to cancel a reverse mortgage within three days after closing.

Don’ts:

*Don’t respond to unsolicited advertisements pushing reverse mortgages.

*Don’t sign any loan paperwork that you don’t completely understand—read the “fine print”.

*Don’t buy other financial products, services or investments to obtain a reverse mortgage.

*Don’t take out a reverse mortgage using just one spouse as the borrower. A reverse mortgage in one borrower’s name comes due when that person dies, and the surviving spouse could face collection proceedings and lose the home.

The AARP Fraud Watch Network Helpline 877-908-3360 is free.