How Banks Fleece Heirs on Reverse Mortgages

Never underestimate the willingness of banks to find new and creative ways to cheat customers, particularly when big bucks are at stake.

Jessica Silver-Greenberg has an important new article at the New York Times on a heretofore undercovered abuse, that of banks violating Federal law on the settlement of reverse mortgages out of an estate. This topic has not gotten the attention it deserves, one suspects, because people who enter into reverse mortgages are generally in less than stellar financial condition and are extracting home equity while hopefully still being able to remain in the home. It’s unlikely that the heirs have thought much about what the terms of the reverse mortgage. Unless they helped their parent(s) make the decision, it’s unseemly to pry. And it’s not uncommon for elderly adults not to have their affairs well squared away before they die, so the heirs, in addition to being bereaved, are also overwhelmed by getting their arms around the estate (a partial list: getting death certificates, arranging for the disposition of the body and the funeral/memorial service, notifying friends of the deceased, finding out where they had bank accounts, paying bills that come due, and dealing with physical possessions).

Reverse mortgages have long been seen as a quasi-predatory product: you really need to read the fine print very carefully and even then, it’s not hard to miss something critical. But the behavior Silver-Greenberg describes has nothing to do with sneaky contract language. It’s flat-out fraud. Here are the critical parts of her article:

…the children of elderly borrowers are learning that their parents’ reverse mortgages are now threatening their own inheritances. Reverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes that need not be paid back until they move out or die, have long posed pitfalls for older borrowers….

Under federal rules, survivors are supposed to be offered the option to settle the loan for a percentage of the full amount. Instead, reverse mortgage companies are increasingly threatening to foreclose unless heirs pay the mortgages in full, according to interviews with more than four dozen housing counselors, state regulators and 25 families whose elderly parents took out reverse mortgages.

Some lenders are moving to foreclose just weeks after the borrower dies, many families say. The complaints are echoed by borrowers across the country, according to a review of federal and state court lawsuits against reverse mortgage lenders.

Others say that they don’t get that far. Soon after their parents die, the heirs say they are plunged into a bureaucratic maze as they try to get lenders to provide them with details about how to keep their family homes….

There is no data on how many heirs are facing foreclosure because of reverse mortgages. But interviews with elder care advocates, the housing counselors and heirs, suggest that it is a growing problem already affecting an estimated tens of thousands of people. And it is one that threatens to ensnare future generations, as older Americans increasingly turn to their homes for cash. Already, the combined debt of Americans from the ages of 65 to 74 is rising faster than that of any other age group, according to the Federal Reverse. And approximately 13 percent of the reverse mortgages outstanding are underwater, according to an estimate from New View Advisors, a New York consulting firm.

As Silver-Greenberg describes, perversely, the problems in the reverse mortgage market are growing even as the size of the market has fallen. The number of loans has fallen by more than half, from 115,000 in 2007 to 51,000 in 2012. But the default rate has risen steadily over the last ten years and is now at 9.4%. And as the market has fallen in size, large banks have departed, leaving it to smaller lenders and brokers who are almost certain to be less concerned about bad press than big institutions who spend a lot of brand imaging. In other words, the shrinkage of the market has probably had a direct hand in the increased abuses.

Here is an overview of how the settlement is supposed to work:

For heirs, the problem with reverse mortgages often centers on the little-known set of federal regulations administered by the Department of Housing and Urban Development….The regulations apply to reverse mortgages that are insured by the Federal Housing Administration, virtually all of the market.

Lenders must offer heirs up to 30 days from when the loan becomes due to determine what they want to do with the property, and up to six months to arrange financing. Most important, housing counselors say, is a rule that allows heirs to pay 95 percent of the current fair market value of the property — a price that is determined by an appraiser hired by the lenders. Mr. Bell of the National Reverse Mortgage Lenders Association said that lenders are strictly abiding by the 95 percent rule.

Please circulate this post to anyone who has a reverse mortgage or to children of parents who have a reverse mortgage. This is important information that will help them protect their rights. It would also help for them to identify mortgage counselors in their area for advice on how to get HUD to pressure a non-compliant lender (note that law schools often have pro-bono clinics that can also help give advice). And enlisting the local media or in areas where it is active, Occupy Homes, are other routes for putting pressure on abusive lenders.

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  1. kevinearick

    they create the money on the loan…and must find a way to circle the square…

    practically, isolated grandma, with no survivors, turns to the RE agency, which is quite happy to inflate the rental price on the resulting dead inventory, hiding the excess supply, paid to do so by the Fed…and the quiet depression continues…and the local contractors in the loop remodel to nowhere….

    more make-work please….

  2. John Mc

    Fred Thompson is the industry spokesperson on HECM’s.

    He should stick to being on Law and Order. Running for president or soliciting financial products is akin to allowing Charlie Sheen to share his views on women, and winning.

    What I find most intriguing is when these products started to become so prevalent. The brokerage industry had just spent 10 years selling their clients financial plans ($250 to $500/pop) accumulating mass data and found out that US citizens (more than most across the world) had one of the largest percentages of their wealthy tied up in their homes (I believe back in early 2000’s – 58-68% – cannot remember which).

    We started seeing President’s talking about “ownership society” and a continued foray into to home equity products (all leading to the glorious) crapification of mortgage and lending standards and consumer mortgage debt saturation. The point is: they had the information about the public, used financial innovation to siphon off wealth from on the front end prior to the financial crisis, while planning to offer them a substitute later on down the road. That substitute, HECM’s (Home Equity Conversion Mortgages). Screw them on the front end, and offer a substitute of lesser quality on the back-end.

    Thanks corporate America! Oh, wait, did I mention that they will only sell these products to people of a certain age (62 > I believe). It is nice to know some scumbag will solicit my mother using fear tactics about not having enough money (so they can get a % rip) and than take ownership of the family home; Ah! a new corporate overlord. Thanks Big Finance, you sure do look out for us so well…

  3. kevinearick

    they create money on the loan…and must find a way to circle the square…

    practically…isolated grandma, with no survivors other than piranha, turns to the RE agency, which is quite happy to inflate the rental price on the resulting dead inventory, hiding the excess supply, paid to do so by the FED and CONgress…and the quiet depression, squeezing grandma, continues…and the local contractors in the loop remodel to nowhere, creating an ‘asset’ on the books…

    more make-work please…

    what is the rate with ZIRP + accounting profit on losses?

    1. John Mc

      Do not leave out ZIRP is another mechanism which disciplines HECM and older clients as well, since their hard earned savings might have yielded 4-5% in income annually now gather moss and are spent down.

  4. Garrett Pace

    “But the default rate has risen steadily over the last ten years and is now at 9.4%.”

    I’m sorry, how do you default on a reverse mortgage?

    1. MikeNY

      I’m no expert, but I think you’re required to keep current on all taxes, maintain insurance, and maintain upkeep. Wouldn’t be at all surprised if people having $ problems are falling behind on one or all…

  5. Peter

    Yves, you fight against the corruption and abusive practices of the banks, yet you scoff at the one piece of technology most apt to make a difference. The financial system is too heavy to change from within.

    1. Yves Smith Post author

      Bitcoin is not a solution. Bitcoin is a gimmick looking for a market. The people who are pushing it are woefully ignorant about the role of money and how payment systems work. I’ve seen this as zillion times in technology deals: the geeks have a technology they love that they think will be a world-beater and don’t bother understanding customer needs or the competitive space. The Bitcoin backer are engaging in the classic behavior of technologists who find at most a niche market.

      Bitcoin is diverting energy and attention from real solutions, like public banking and regulating banks like utilities.

      1. gepay

        Why don’t governments use bitcoin type processes to create their own national bitcoin type currency – I am sure they have the cpu capacity to effectively mine them and regulate them – instead of borrowing money from central banks – requiring taxes to be paid in them? Like say Scotland if it votes to leave the UK or Greece if it ever decides to leave EU ?

        1. Yves Smith Post author

          Because they don’t need to. But they might eventually issue digital currency, the purpose of which would be to eliminate cash and make all transactions traceable.

          Be careful what you wish for.

  6. JCC

    It’s not only Reverse Mortgages that banks take advantage of when there is a death in a family, but any mortgage.

    I had a brother die a few years ago in FL. Within a week of his death, not only did I hand carry the Death Cert. to his local Bank office, I faxed a copy to both the Regional Office and National Office (WAMU) per the instructions of the local office. FL has a law on the books stating that once this is done, until the probate is completed, everything regarding the mortgage is on hold.

    I mentioned to the rest of my family that since the house was in FL. and he owed less than 10% of the original note (it was 2009), and the mortgage was with the notorious criminal organization known as WAMU, that that we had better expect trouble, so receipts for everything was paramount.

    We got it shortly afterwards… no record of any Death Cert. ever presented so foreclosure proceedings were immediately implemented. Again, more Death Certs sent, copies of Obits, the Fl. Statute, etc were sent but they refused to stop the proceedings. And why not, a $200K+ home with a $16K mortgage in a nice neighborhood in a nice town with 10’s of For Sale signs everywhere in sight. Easy Pickings.

    Luckily we had a smart lawyer, a couple of letters threatening counter-suits, and, due to my complete lack of trust in any of these institutions any more, a few receipts for the hand over of the multiple Death Certs, (and some extra fees tacked on by the lawyer to fight these bastards off) stopped them in their tracks (with no apology, of course).

    I would trust a Bank and a bank contract today, law or no law, just about as far as I could throw the building it’s housed in.

  7. Bud in PA

    I don’t understand why someone has to pay mortgage insurance for a reverse mortgage either. If the equity in your home is the basis for the loan (it’s collateral), then you shouldn’t have to. Isn’t this just another ripoff fee for the banks?

    1. walt

      As I wrote to my brother this morning:

      It’s a mistake to use California for the poster child. Mortgages are secured by the houses, but the lenders have no judicial recourse: all she has to do is move out.

      If her parents were alive, a lawyer would tell them to move out. They spent whatever the current value of the house is. Blame them.

  8. ReverseMtgsucks

    For those asking about how does one default, let me explain. For a home where the last parent took out a reverse mortgage, when that parent dies, then the loan becomes due. There is 30 days to tell lender what you are going to do and six months essentially to sell the house and pay off the loan. The default occurs when the last parent dies and the house is ot sold. Understand that in months prior to parent dying there can be work/life upheaval (taking care of parent, vising parent in hospital, etc). After parent dies, reverse mtg company expects you to be able to 1) move out personal belongings of parent 2) sell furnitures/etc 3) fix up home (it is likely not show ready) for sale 4) list home and sell it all within 6 months.
    You’ll be grieving and emotional in the first 3 and for a large home it could take months to prep to sell. Then there’s the market. Mom lived in small town so not many buyers. It takes 12 months or more to sell a good home at a fair price in low turn-over small towns.
    Don’t forget though, you cannot REFINANCE it yourself, even if you qualify if you have had the property for sale in the last 90 days. If lender comes calling and you haven’t sold you need to ‘buy’ 3 months of time without house for sale just to refi it to pay off reverse mtg.
    (and you must qualify debt/income ratio with your current house + mom’s house).
    Lender, Financial Freedom is horrible, they just go into foreclosure as first step. And they pad the total due with any fee they want, including attorney fees because they took first step of going to attorney. Your only action is to file TRO and get prelim injunction to stop them and get amounts negotiated down or ordered by the court.

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