Scam-Proof Your Assets also argues that the government must take greater action to end this crime wave. You can help. Buy the book from RDA-Press.com by clicking below.
I’ve covered so many scams I couldn’t fit all of them into Scam-Proof Your Assets. So the following is an excerpt that didn’t make the book, but is important for you to know.
Home Equity Conversion Mortgage Scam
First, a home equity conversion mortgage is an actual, legitimate type of mortgage, one type of what’s known as a reverse mortgage, and some say they can be helpful for seniors. Whereas in a typical mortgage, you take out a bank loan and slowly make payments until you’ve paid it off, a reverse mortgage, like its name suggests, works in reverse: The bank pays you all the money for the house—in a lump sum, in monthly payments, or through a line of credit—so your debt grows rather than decreases. You can’t really pay the loan back until you sell the house, with anything that might be left over going to heirs. Reverse mortgages are often promoted to seniors as a way for them to afford life in their later years. Family members left behind can then sell the home once the elderly owner has passed away and pay off the debt.
According to HUD, HECMs are the most common type of reverse mortgage, and it’s the only type that’s insured by the Federal Housing Administration. In this scenario, the homeowner is able to take advantage of equity earned in a home. The maximum loan amount of about $680,000 is available to a homeowner aged 62 or older who lives in it as the primary residence. The homeowner must have paid off the home or at least paid a significant portion of it. Terms are available at fixed or adjustable rates for a period of time that may be selected by the homeowner. The reason it’s endorsed by the government is that the homeowner doesn’t have to start paying on the loan until he or she is no longer living in it as a primary residence. Also, the loan involves FHA mortgage insurance that guarantees the owner or the heirs won’t have to pay more than the value of the home, even if that amount is lower than the loan amount.
But it’s definitely not a low-risk mortgage, which is why anyone considering a reverse mortgage of any sort has to go through mortgage counseling. It’s not a decision to make on the spur of the moment during a time of financial hardship. But scam artists and unscrupulous mortgage and financial insiders know that HECM’s are legitimized by the U.S. government, and they take advantage of this fact to con seniors who are concerned about making ends meet without a salary. This is a particularly easy sell because the terms of reverse mortgages are hazy at best to most people, so it’s easy for con artists to gloss over the important details.
Even though they may not blatantly be attempting to steal money, business people hungry to sell reverse mortgage products may use high-pressure sales tactics to sell the product to homeowners who aren’t a good fit for it. The Wall Street Journal actually says that the majority of these scams are perpetrated by people the victims know, such as financial advisors.
Reverse mortgage scams include the following:
- The fraudster may take out an HECM without the homeowner’s knowledge in order to obtain the loan for the value of a home that the homeowner is now responsible for paying. Often this is done by relatives of seniors who are preying on their neediness and abusing their personal connections. They may take the monthly payments and keep some or all of it themselves rather than give it to the homeowner.
- Obviously, those taking out lump-sum loans are at greater risk of scams. Some scammers find out who is opting for a cash-out reverse mortgage, in which the total value of the loan is taken as a lump sum, then fraudulently take the money or transfer it to a personal account. This can be done by an insider—for instance, a mortgage broker or relative, who endorses the check and puts it in his or her own account. Then the person may explain that the borrower has to go through this person to receive the money. The scammer only distributes a portion of the full amount and keeps the rest for him or herself. In one Michigan case detailed in a report by the Consumer Financial Protection Bureau, a loan officer directed the closing agent to write two checks: One to himself for over $42,000, and one to the actual borrower, for just over $61,000. In the end, the borrower was left with a balance of more than $131,000—nowhere near the amount received.
- Some scammers convince reverse mortgage recipients to invest those loan dollars into shady schemes, promising they’ll double their money and preying on their desire for financial security or wish to leave money to their heirs.
- Some crooked loan salesmen may offer reverse mortgages as “free income,” when in fact a mortgage isn’t income, it’s a loan payment, which is why it’s not taxed. This type of pitch cleverly hides the associated fees as well as many of the terms of the loan, such as the fact that the homeowner still must keep up the property and pay the property taxes each year. Other tactics suggest taking reverse mortgages as a way to delay Social Security benefits until 70, despite the fact that the CFPB found that the costs of doing so always exceed the cumulative savings created by delaying retirement benefits. Or they may create straw buyers in order to purchase distressed properties, convincing unwitting seniors to “purchase” the low-cost properties by taking over the deed without exchanging any money. Then, in this too-good-to-be-true scenario, the homeowner is convinced to take a cash-out reverse mortgage based on inflated appraisals, and the scammer makes off with the loan amount.
Reverse mortgages are a calculated risk that should involve insights from numerous professionals. Be sure, before considering any such option, that you speak with a certified HUD housing counselor and consult Better Business Bureau reports regarding any mortgage broker or lender. Of course, don’t believe anyone who claims to be able to offer you a home—or money for your home—with no strings attached. There are always strings, and they may be really pricey ones.
Scam-Proof You Assets: Guarding Against Widespread Deception covers the threats we all face from cyber criminals. It can be found on Amazon.