Reverse Mortgage ‘Services’ Rip-Off Seniors

The slick telemarketing pitch to senior homeowners goes like this:

May I send you, at absolutely no obligation, information on how you can turn your home equity into monthly income at no cost to yourself? The money will simply add to your income without affecting any other payment you may now be receiving, such as Social Security or Supplemental Security Income (SSI).

The pitch--part of a new, fast-spreading campaign to market reverse mortgages and annuities--is fraught with problems for homeowners 62 and older, according to consumer advocates specializing in helping older Americans.

The “free information” is being offered by self-described “service providers,” who charge seniors thousands of dollars for doing little more than referring their loan applications and personal financial profiles to mortgage lenders and life insurance agents.

The unregulated service companies pocket 8% to 10% of any loan they produce for referral--a cut that one consumer advocate described as “absolutely egregious.”

“The [service provider] is just setting up referrals, but walks away with more money than anybody in the transaction,” said Ken Scholen, head of the nonprofit National Center for Home Equity Conversion, the leading authority in the country on reverse mortgages.

One of the hottest financial products of the 1990s for seniors, reverse mortgages allow owners to turn their home equity into spendable cash without having to make monthly interest or principal payments.

Under a reverse mortgage, the lender sends the borrower money via a credit line, a lump-sum payout or monthly check. Generally lenders don’t receive their money back, plus interest, until the borrowers move out of the house, sell it or die.

On March 17, the Housing and Urban Development Department directed lenders to stop dealing with so-called “service providers.” HUD said there were perhaps 100 companies nationwide that are charging up to 10% of the mortgage proceeds.

The agency told lenders they will be disqualified from all Federal Housing Administration (FHA) programs if they knowingly make loans to people who have to pay such firms.

HUD learned of the fees in recent weeks and decided to act quickly because some companies were selling “distributorships” to others around the country, officials said. A scheme with several hundred victims, they feared, would quickly turn into one with several thousand.

Roughly 45,000 reverse mortgages have been closed in recent years, the bulk of them through HUD’s Home Equity Conversion Mortgage. Private lenders include Transamerica Home First’s “House Money” program, Household Bank’s “Household” program and Fannie Mae’s “Home Keeper” program.

Increasing numbers of lenders are entering the reverse mortgage arena, spurred by research suggesting the number of equity-rich seniors is huge and growing fast.

A new study from Budd Lake, N.J.-based SMR Research Corp. estimates that more than 23 million American homes are owned free and clear of mortgage debt, and that the average age of the owner of those houses is 64.3 years. More than 11% of all debt-free homes are owned by people 80 or older, according to SMR.

Many of these senior owners not only are equity-rich, but cash-poor, SMR President Stuart A. Feldstein says. They “often live on fixed incomes. They have cash needs, including much higher-than-average medical costs. But their incomes prevent them from getting conventional loans,” he said.

Their economic situations make them ideal targets for fly-by-night telemarketing operations that obtain commercially available data on homeownership, mortgage debt and age, according to Scholen.

The firms apparently change their names frequently or work through franchise arrangements. The real objective of the “service providers,” says Scholen, usually is to persuade seniors to apply for a large, lump-sum reverse mortgage and to invest most or all of the cash into an annuity sold by an insurance company.

Senior homeowners interested in a reverse mortgage are asked to sign an agreement permitting the service company to take 8% to 10% off the top of the lump-sum payment as its commission. That fee, charged above and beyond the normal loan expenses associated with a reverse mortgage, can be substantial.

For example, an 80-year-old owner of a debt-free $160,000 house might qualify for an $80,000 lump-sum reverse mortgage payout at closing. The service company that referred the senior to a lender active in the HUD program would pocket $8,000 for the referral, according to Scholen. The funds typically are listed as “paid outside closing” on the HUD-1 standard settlement sheet.

To avoid rip-offs like this, Scholen recommends that senior homeowners follow these rules:

* Never deal with a loan marketer who only wants to talk about one form of reverse mortgage--typically a lump-sum payout. The most advantageous type of reverse loan for many consumers, according to Scholen, is often a credit line that need only be drawn upon when the senior needs cash.

* Get independent advice on the quality and performance of any annuity you buy with reverse mortgage cash proceeds. The telemarketer “service providers” often direct consumers to low-rated, low-performance annuities that represent “terribly overpriced deals” compared with higher-rated annuities, according to Scholen.

* Be aware that taxable annuity payments can reduce your cash benefits from--or render you ineligible for--government programs like SSI, no matter what telemarketers might tell you. “You could lose your eligibility for Medicaid” by signing up for an annuity program in connection with a reverse mortgage, Scholen said.

For more information, call the National Center for Home Equity Conversion at (612) 953-4474.

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Distributed by the Washington Post Writers Group.