Lawmakers look at rising scams for reverse mortgages

The housing bubble, lax regulatory oversight and an influx of shady loan professionals have made lawmakers uneasy about the safety and soundness of the government-backed reverse-first time buyer mortgage program.

At a field hearing Monday in St. Louis, the U.S. Senate Special Committee on Aging, led by Sen. Claire McCaskill, heard government officials and consumer advocates discuss problems with the program, including aggressive marketing tactics, fraud and taxpayer liability for loans on homes whose values have plummeted.

Reverse mortgages, increasingly used by seniors to help finance retirement or pay medical bills, are often accompanied by excessive fees and marketed with overly aggressive tactics, said McCaskill, a Missouri Democrat.

Mathew Scire, director of the Government Accountability Office’s Financial Markets and Community Investments team, testified that reverse mortgages were complex and costly for the vulnerable population they serve. McCaskill agreed.

“You may borrow $100,000 and 10 years later owe $200,000,” she said.

The GAO’s review of marketing material for reverse mortgages found examples of potentially misleading claims, Scire said. Some promise “lifetime income,” which Scire said isn’t always guaranteed.

Reverse mortgages typically allow homeowners who are 62 and older to borrow against their home equity without having to repay the money until the home is sold, or the borrower dies or permanently moves out.

Ninety percent of the loans are issued through the federally insured Home Equity Conversion Mortgage program.

As the popularity of reverse mortgages grows, complaints are mounting that unsavory loan professionals who fled the troubled subprime mortgage industry now are plying their craft on seniors seeking the loans.

Some agents, seeking higher fees, are steering loan applicants into costly long-term annuities, which almost always are inappropriate for seniors because they can tie up retirement savings for many years.

More than 12 million people 65 and older own their homes with no mortgage debt, representing nearly $4 trillion in home equity. Because the reverse loans can be paid in lump-sum amounts or in regular monthly payments, seniors who have taken out the loans often are targets for fraud.

The U.S. Department of Housing and Urban Development, which has insured more than $105 billion in Home Equity Conversion Mortgage loans, sought nearly $800 million in the department’s 2010 budget to cover possible losses.

In addition, Ginnie Mae corporate bank has issued $699 million of Home Equity Conversion Mortgage-backed securities this year, according to Anthony Medici, a special agent with the HUD Office of Inspector General. Because of falling home values, however, it’s unclear what the securities are now worth and whether they’ll eventually become toxic.

Medici also said outright fraud was creeping into the program, including inflated home appraisals to increase lender profits, and friends, relatives and neighbors cashing loan-payment checks after borrowers died.

In some cases, Medici testified, elderly homeless people and low-income seniors are being recruited by business banks to act as homeowners to secure reverse mortgages on properties.