Homes, Loans and Scams
Creative financing deals that allow homeowners to borrow against their properties can be either boons or nightmares. The advantages of tapping home equity are obvious. The downside is that unwitting homeowners may become victims of unscrupulous lending practices. This is especially true for the elderly, who sometimes do not understand the risks of reverse mortgages, and for homeowners who negotiate loans at 125% of a home’s value.
Elderly people who own a home free and clear can use a reverse mortgage to draw against their equity to cover monthly living expenses. Under such a deferred-repayment loan, monthly payments are not required. The loan is repaid from proceeds when the borrower sells the home or when the residence is sold after the borrower dies. Perfectly legal.
But some telemarketers and other companies scam the elderly through high-pressure tactics. And some unsophisticated borrowers who took out reverse mortgages are battling to save their homes.
Federal guidelines require disclosure under truth-in-lending laws, but oversight is wanting in this new arena. In California, for instance, some unscrupulous operators have managed to stay in business by getting a license from the state Department of Real Estate and, if that license is revoked for fraudulent practices, then turning around and getting a similar license from the state Department of Corporations. The two agencies should move with all possible speed to coordinate their application processes and ferret out scam artists.
Another financing concept that needs better oversight involves mortgages written for more than the value of a property. TV pitchmen offer loans at 125% of a home’s value and flog them as a way to consolidate consumer debts. But borrowers are at risk of being misled about tax deductions on such loans.
Homeowners need to take a hard look at such offers and get professional advice. The IRS, for instance, limits deductible interest to the amount of a loan that reflects the home’s value. The lack of clarity could lead consumers to mistakenly believe they have the opportunity to convert a huge amount of nondeductible auto and credit card debt into ostensibly deductible mortgage debt.
Sen. Jack Reed (D-R.I.) has proposed requiring lenders to disclose in all advertising, and to loan applicants, that interest payments on loan balances above the home value are not deductible. That’s a consumer protection that makes sense.
