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Reverse mortgages are HUD’s new innovation for older home owners. Although the program has been in existence for many years, it is only recently that revisions to the program have made it possible for numerous lenders nationwide to begin offering the program. As with many new government programs, the potential for fraud is always present. The Almanac investigates reverse mortgage scams.
WASHINGTON, DC-The Department of Housing and Urban Development (HUD) issued a directive March 17 to prevent senior citizens from being charged thousands of dollars each for information about HUD’s re-verse mortgage program, Secretary Andrew Cuomo announced. Mr. Cuomo said HUD provides access to the same type of information on reverse mortgages free of charge through an information line: (888) 466-3487.
HUD directed lenders that issue mortgages insured by the Federal Housing Administra-tion (FHA) to stop doing business with companies that charge the large fees for providing information on HUD’s reverse mortgage program. The HUD directive will go to the 8,000 FHA-approved lenders around the nation from Assistant Secretary for Housing Nicolas P. Retsinas.
Mr. Cuomo said HUD is conducting its own investigation of firms charging large fees for HUD reverse mortgage information and is asking the Federal Trade Commission to also investigate the firms, which bill themselves as “estate planning services.” He said HUD will share information it gathers with the FTC, Federal Reserve, State Attorneys General and local law enforcement officials, and ask their cooperation in gathering evidence to determine which companies have violated any laws or regulations so they can be prosecuted.
“We will not allow scam artists to use our reverse mortgage program to victimize senior citizens,” Mr. Cuomo said. “No one needs these services to get a reverse mortgage. HUD gives people the name and phone number of a nearby HUD-approved non-profit housing counseling agency at no charge. The counseling agency gives callers information about our program and tells them how to contact at least three participating lenders.”
Many older Americans signing contracts with the companies charging the large fees are reportedly unaware that the firms charge a fee of 6 to 10 percent of the total amount borrowed through a reverse mortgage, Cuomo said. This works out to a fee of $3,000 to $5,000 on a $50,000 reverse mortgage, and $6,000 to $10,000 on a $100,000 reverse mortgage, for information available free of charge from HUD.
The American Association of Retired Persons (AARP) has supported HUD’s actions. “For 10 years, AARP has worked closely with a bipartisan group of members in Congress, industry leaders, and with HUD to ensure that consumers are protected against potential fraud and financial exploitation,” said Martin A. Corry, AARP Director of Federal Affairs. “AARP applauds HUD’s prompt actions to investigate this problem and their attempts to prevent such abuses.”
“By barring FHA lenders from dealing with companies that charge huge fees to act as unneeded middlemen for HUD’s reverse mortgage loans, we will make it impossible for these companies to continue taking advantage of older Americans,” Mr. Cuomo said. The HUD Secretary said people who want to report complaints about firms charging high fees for reverse mortgage information can also call HUD toll free at (888) 466-3487. In addition, anyone can get the entire list of HUD-approved housing counseling agencies on the World Wide Web through HUD’s home page at http://www.HUD.gov or http://www.aspensys.com/hcc.
HUD estimates that several hundred elderly homeowners have been victimized by companies charging thousands of dollars for information on HUD reverse mortgages. The companies are signing up franchised distributors and expanding their activities, so without action by HUD, the number of homeowners charged exorbitant fees for free information could soon grow into the thousands.
Lenders and AARP have identified six estate planners, most of which may be affiliated with each other, that are charging the fees. All are located in the Mid-West or West, but may be operating nationwide.
The FHA has insured about 20,000 reverse mortgages around the country since it began the program in 1989, and is working to increase the number in the next few years. About 125 lenders participate in the reverse mortgage program. The number is expected to grow as the program gains popularity.
Cuomo said the firms under investigation convince older homeowners that they provide a valuable service by giving them information about reverse mortgages. In fact, lenders report that all the services often do is give elderly homeowners the name of a HUD-approved counseling agency and accompany the homeowners to a counseling session. The counseling is legally required in order to obtain a reverse mortgage loan.
Lenders have told HUD that the services pressure older people to get lump sum reverse mortgage payments — so the estate planners can collect their entire fee in one payment. Many of the services and their distributors are also reported to market multiple insurance policies to the elderly borrowers to collect even more money from the proceeds of their reverse mortgages.
Even before the March directive to FHA-approved lenders, three large mortgage companies acted on their own to stop doing business with estate planners in issuing reverse mortgages. Despite the recent scams, HUD is still committed to its reverse mortgage program. “Reverse mortgages are an excellent way of allowing an older person or couple to unlock the accumulated cash value of their home without having to sell the home,” Cuomo said. “This can make a dramatic difference in the lives of many senior citizens.”
How HUD’s Reverse Mortgage Works
The HUD reverse mortgage program is formally known as the Home Equity Conversion Mortgage (HECM) program. Homeowners 62 or older can borrow against the value of their homes. Homeowners receive payments from lenders on a monthly basis, in a lump sum, or as a line of credit. No repayments are required while a borrower lives in the home. Lenders recover their loans plus interest from the sale of the home when owners die or move out.
The size of reverse mortgage loans is determined by the borrower’s age, the interest rate and the home’s value. The older a borrower, the larger the percentage of a home’s value that can be borrowed. For example, based on a loan at today’s interest rates, a 65-year-old could borrow up to 26 percent of the home’s value, a 75-year-old could borrow up to 39 percent, and an 85 year-old could borrow up to 56 percent.
There are no limits on the value of homes qualifying for a HUD reverse mortgage, but the amount that may be borrowed is capped by HUD’s maximum limits
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