Reverse Mortgage Abuse on the Rise

EDITOR'S NOTE: This article was originally published in the May 2008 issue of Kiplinger's Retirement Report. To subscribe, click here.

After her husband died in November 2003, Ernestine Boach met with a financial adviser, who told her that her $60,000 life-insurance policy was inadequate. He assured Boach, who had just retired as a clerk for a local school district, that he could boost the value of the estate that she would leave to her daughter. And, he said, it wouldn't cost her a cent. "He said he had a wonderful deal for me," recalls Boach, of Chula Vista, Cal. "He said all I have to do is buy a reverse mortgage."

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What she really bought though was a lot of trouble, according to a lawsuit she later filed in California Superior Court. The adviser, who was an insurance agent, called in an employee of Financial Freedom Senior Funding Corp., a large reverse mortgage lender based in Irvine, Cal., who arranged a $171,000 loan.

With part of the reverse mortgage, Boach bought a $250,000 life-insurance policy. The agent also sold her an immediate annuity for more than $44,000 and told her that the $4,000 annual payout would pay the insurance premium, the suit alleges. In addition, Boach bought an $80,000 deferred annuity, which, she says she was told, would eventually pay back the reverse mortgage. Her heirs would get the house free and clear as well as the life-insurance proceeds.

After signing on, Boach began to worry. A real estate agent crunched the numbers. Within five years, she would owe $240,000 on the reverse mortgage, for principal and interest. By then, Boach says, the $80,000 annuity would have grown to only $97,000. Plus, the suit says, once the immediate annuity ended in ten years, she'd have to pay the life-insurance premiums out of pocket.

Boach wanted out. To pay back the reverse mortgage, she took out a home-equity loan, which will cost her $1,000 a month, she says. Boach, now 67, says her blood pressure has shot up after four years of fretting. "It will affect me for the rest of my life financially and health-wise," she says.

Michelle Minier, chief executive officer of Financial Freedom, says the suit is "baseless and meritless." But she says the company "settled for nuisance" with Boach for a small amount.

Minier notes that all customers must sign an "annuity disclosure," which states that the lender does not require or arrange the purchase of annuities in connection with its loans. "We generally discourage the use of reverse mortgages to fund an annuity," Minier said in an interview. "But there are situations where it might be completely appropriate." She says the company encourages customers to seek advice from family members and independent financial advisers.

The Wild and Woolly Market

Sad to say, Boach is not the only borrower who's complaining. Seniors are increasingly becoming targets of aggressive marketers who are selling reverse mortgages that many customers don't need or understand, according to members of Congress, government regulators and consumer advocates. And as in Boach's case, some promoters are accused of persuading seniors to use loan proceeds to buy annuities and other high-commission products.

The marketing blitz, combined with an aging population, has fueled a dramatic increase in the most common type of reverse mortgage, the federally insured Home Equity Conversion Mortgage (HECM) loan. The number of HECM loans rose to 107,558 in 2007, up from 6,640 in 2000, according to the National Reverse Mortgage Lenders Association.

As the number of loans has grown, angry homeowners are filing lawsuits against lenders, alleging predatory practices. Meanwhile, the Florida Attorney General and the Financial Industry Regulatory Authority, which oversees securities firms, issued alerts this year to warn about the risks of reverse mortgages (read FINRA's tips at www.finra.org).

Congress is getting into the act. In December, the Senate Special Committee on Aging held hearings on abusive sales practices. Senator Claire McCaskill (D-Mo.), who chaired the hearing, wrote an amendment to major housing legislation that would prohibit lenders from requiring seniors to purchase an annuity or other products when taking out a reverse mortgage. "This is the wild, wild West out there selling a financial product that's expensive and complicated to our elderly," she said on the Senate floor.