How does a reverse mortgage work?
As more and more baby boomers head toward retirement, numerous countries, including the United States, face the challenges of an aging population. Among the difficulties is the lack of sufficient financial resources to comfortably sustain a senior citizen in the final years of life. Individuals and governments alike are feeling the economic crunch of elder care. One solution that many are availing themselves of is the reverse mortgage.
A reverse mortgage is not a second mortgage. There are important similarities and differences between them. Both give borrowers access to the equity they have built up in their homes. They do that by offering loans using the home as collateral. What makes the reverse mortgage unique, and the reason why only seniors can get them, is that there is no need to make any payments on the loan as long as the borrower is alive and living in the house. The recipients of reverse mortgages still must pay property taxes, homeowner’s insurance, and maintenance fees. The principal plus interest continue to grow until the borrower moves out or dies. Only at that point does the entire loan come due.
When done correctly, reverse mortgages can be a good option for financially-strapped senior citizens. Perhaps to emphasise that, one prominent American reverse mortgage company hired actor Tom Selleck as its spokesman (though Tom Selleck himself is certainly not pinching pennies in retirement).
Reverse Mortgage Fraud
Unfortunately, reverse mortgages are prone to generate reverse mortgage scams. Many seniors have lost their homes as a result. This is an especially pernicious crime. After all, it targets a particularly vulnerable population with little recourse to defend itself.
In 2017, for example, a Chicago loan officer was charged with defrauding 125 elderly African-American homeowners out of $7 million in a reverse mortgage scam either without their knowledge or by misrepresenting the terms of the loan. The victims ranged in age from 62 to 97. A number of them faced foreclosure as a result. The loan officer was accused of pocketing the funds himself. By 2020 another 40 complaints against him had been received, and the amount he was accused of pocketing had risen to $10 million. According to research conducted by USA Today, reverse mortgages in African-American neighbourhoods wind up in foreclosure six times more often than those in neighbourhoods that are 80% white.
What Tactics Do Reverse Mortgage Scammers Use?
One common tactic used by scammers is to aggressively market reverse mortgages to people who either don’t need them or don’t qualify for them. The scammers frequently tell victims that the loans are risk-free. Or even that the reverse mortgage allows them to freely access money without ever paying it back. As a result, there are seniors on fixed incomes who took out reverse mortgages to pay for expensive cruises or other non-critical expenses.
Other seniors want to use the loan to pay for much needed home repairs. In exchange, however, the scammer requires the borrower to agree to use a ‘recommended’ contractor. The ‘recommended’ contractor, of course, is in cahoots with the scammer. He either does shoddy work or never even shows up at all. Allegedly, this is exactly what happened in the case of two New Jersey home contractors arrested in 2019.
The indictment accused them of using purposefully inflated home appraisals to secure bank loans. Large loans. So large that their victims would never be able to repay them. They also fraudulently had the loan money deposited into bank accounts that they controlled, rather those of the borrowers. The victims of these crimes are not just the senior citizens. They’re also the lending banks. In other cases, the scammer may purposely undervalue the home in order to minimise the size of the loan. Sometimes, the scammer convinces the homeowner to leave the spouse’s name off the loan. In that case, when the spouse who signs dies, the surviving spouse who didn’t is left destitute. He or she will inherit a massive loan that has to be instantly repaid, or face eviction at the most fragile time of life.
If you think you’ve been the victim of a reverse mortgage scam, contact the fund recovery experts at MyChargeBack.