Reverse Mortgage Scams Targeting Older Adults

In the aftermath of the mortgage crisis, government officials are admonishing consumers to be on the lookout for yet another kind of mortgage loan fraud—reverse home loans. A small but rapidly growing market, reverse mortgage loans have been flagged by the FBI as an increasingly popular tool for scam artists. The FBI and the United States Department of Housing and Urban Development have their fingers on the pulse of the reverse mortgage situation, as 99 percent of reverse mortgage loans are federally insured.

Reverse mortgages are available to homeowners age 62 and older who wish to turn their home equity into cash. Rather than sending a mortgage payment to the bank every month, the homeowner receives a payment from the lender. The payment can take the form of a line of credit, a lump sum, or a monthly payment. The homeowner repays the reverse mortgage with interest when he/she dies, sells the home, moves away, or ceases payments on the home insurance policy or property taxes. Inundated with healthcare and other expenses, more and more seniors are accepting reverse mortgages as a way to supplement their rapidly diminishing nest eggs.

Sadly, reverse home loan fraud is usually perpetrated by the homeowner’s relatives, financial advisers, or caretakers. Reverse mortgages are the scam of choice when unscrupulous buyers try to rid themselves of a distressed piece of property. For example, a real estate speculator might buy properties for well under market value, inflate their appraisals of the properties, and then sell them to unwitting seniors looking to take out a reverse home loan.

The Department of Housing and Urban Development (HUD) believes the problem is only going to get worse. HUD is dealing with more cases of suspected reverse mortgage fraud than ever, and they fear that decimated nest eggs from the recent stock market crisis will result in even more of a demand for reverse mortgages. In fact, in 2008, 112,000 federally insured reverse mortgages were issued, compared to 43,082 in 2005. In early 2009, Congress also boosted the limit against which homeowners can borrow to $625,500. Larger loans mean reverse mortgage scams will be more lucrative than ever for scam artists.

The most pernicious reverse mortgage scam involves “flipping,” or selling a distressed property to a senior for well above market value. The speculator who sells the home provides the buyer with an obscenely inflated appraisal to justify the selling price. The senior who buys the home gets a reverse mortgage but also unknowingly sends some or all of the profits to the scam artists behind the deal. To combat this, a handful of senators are pushing for legislation that would require a government-certified official to perform the appraisal on reverse mortgage loans.