Watch out for reverse mortgage scams

Some lenders have been taking advantage of homeowners with reverse mortgages

The reverse mortgage is a home lending product that has been around for a while, but is just now beginning to enjoy popularity among consumers. The product has taken some time to gain a foothold in the marketplace; part of that is due to some state laws, such as those of Texas, that were not written to accommodate the unusual loans.

Now that they are gaining in popularity, they are also becoming tools for mortgage fraud, as several people have been arrested in recent months for defrauding elderly borrowers. This type of fraud, like loan steering, seems to be on the rise.

A reverse mortgage, as the name implies, works in the opposite way from a traditional mortgage. A homeowner with a fully-paid home can borrow against the home’s value by taking out a reverse mortgage. The lender gives the borrower funds in the form of a lump sum, a monthly payout, or a line of credit against which the homeowner may borrow. The borrowed amount, with interest, is repayable when the borrower dies, moves, or sells the home. At the time of repayment, the amount to be repaid may not exceed the value of the property. Borrowers must be at least 62 years of age.

Reverse mortgages aren’t for everyone; they tend to have fees and interest rates that are higher than those of more traditional mortgages. And the thought of selling the home, rather than leaving it to heirs, leaves some homeowners uncomfortable. None of this bothers the unscrupulous lenders who have been taking advantage of borrowers, however.

The scam seems to work like this. The borrower contacts the lender, who makes arrangements for the loan. Unknown to the borrower, the lender misrepresents the amount of the loan and tells the borrower that he or she will receive a sum that is less than the actual loan amount. In one well-publicized case, the loan amount was for $100,000, but the borrower was led to believe that the sum was only $60,000. At closing, the borrower received a check for $60,000. What she didn’t know was that the lender’s agent received a second check in the amount of $40,000. Worse, the agent actually did this nearly 40 times, accruing more than one million dollars in the process.

It’s easy to pull this sort of scam. Most people are not that familiar with the intricacies of home loans in general or those of reverse mortgages in particular. They trust the lender, or their agent, to tell them what to do and when to do it, and they trust them to be honest. Unfortunately, a little misplaced trust can do a lot of damage in the case of mortgage fraud.

The authorities are looking into this case and others, but this seems to be only the tip of the iceberg. As baby boomers get older, more and more of them will seek out reverse mortgages. Over time, the value of the houses they are borrowing against will increase, and the incentive to steal will only grow greater. If you are considering a reverse mortgage, you might consider hiring an attorney to look over the paperwork. It won’t cost much, and you have a lot to lose if you don’t.