MLO Mentor is an ongoing series covering compliance best practices for Mortgage Loan Originators (MLOs). This article discusses abuse, theft, and fraud schemes related to Home Equity Conversion Mortgages (HECM). Register for the first tuesday 8 hour CE NMLS to renew your California MLO license and learn more about preventing fraud and abuse in your practice.
Net worth conversion mortgages exploited to defraud the elderly
In 2009, the Federal Bureau of Investigation (FBI) and the US Department of Housing and Urban Development The Office of Inspector General (HUD-OIG) released a report showing a Home Equity Conversion Mortgage (HECM) abuses. The FBI and HUD-OIG found that loan officers, mortgage companies, investors, credit counselors, appraisers, builders, developers, and realtors were exploiting HECMs to defraud seniors.
Investigators found that the scammers used local churches, investment seminars, and advertisements on television, radio, billboards, and mail to target seniors. Protect your customers by familiarizing yourself with some common HECM scams.
Stock theft schemes
The number one abuse found by investigators was the equity theft scheme. Scam artists in stock theft schemes have identified foreclosed, distressed, or abandoned properties (or buyers) using information in county deed records. They then bought the properties using straw buyers. Straw buyers would commit occupancy fraud by declaring their intention to use the property as their primary residence.
The scammers then recruited seniors to “buy” the straw buyers’ properties by transferring the title deeds to the seniors without exchange of money. Once the seniors met the 60-day occupancy period, the scammers arranged for the seniors to get the HECMS, using inflated ratings. Then the elderly were encouraged to withdraw a large lump sum of equity. The crooks then took the equity and fled.
Foreclosure Rescue Programs
In foreclosure rescue schemes, scammers target seniors who are at risk of losing their homes to foreclosure. Scammers offer reverse mortgage programs with the promise that these programs will prevent foreclosure.
Once the seniors are ready to enter into a loan agreement, the scammers inform the seniors that they are not eligible for a reverse mortgage at all. Instead, scammers persuade seniors to take out another type of loan offered by the scammer.
The scammers then locate a straw buyer, order fraudulent home repairs, complete an inflated appraisal, and obtain a mortgage that transfers ownership to the elderly. The crooks then pocket the net worth. Older people are often advised by the new owner to buy back the house at a higher price or find other ways of living.
Some seniors are recruited through advertisements for “free housing” and willingly participate in these arrangements. Ratings are usually inflated. The elderly can live in the houses as long as they pay taxes, insurance and maintenance.
Lenders don’t realize a problem exists until older people die or move out. At that time, any lenders’ losses resulting from the false equity are passed on from the lenders to the FHA, which pays the shortfall.
Investment schemes are similar to stock theft schemes and are used by scammers to steal HECM loan proceeds under the guise of investing it in an annuity, real estate, or other investment product. The perpetrators of this scheme are often affiliated with the originator of the HECM loan and sell the investment product to the victim.
Remember that the mortgage broker and the lender involved in a reverse mortgage are prohibited from:
- participate in or otherwise associate with any party that participates in or is associated with any other financial or insurance activity;
- accept any inducement to provide the Borrower with any other financial or insurance product; or
- directly or indirectly require the purchase of any other financial or insurance product as a condition of the arrangement or realization of the reverse mortgage. [12 USC §1715z-20(n)-(o)]
Buy and guarantee
This scam is perpetrated directly by the senior borrower as part of a HECM purchase credit. In this scam, the borrower buys a more affordable home with the intention of not making any more payments on the previous mortgage.
Additional schemes associated with reverse mortgages include selling unsuitable financial products, broker conversion, misrepresentation of permanent residence, age and skill of the borrower, identity theft, value inflated collateral, falsification of land register/deed, false repayments of pre-existing liens and mortgages, loans arranged by children or other third parties without the consent of the primary borrower, falsified power of attorney, fraud of a settlement agent and scams charging excessive fees for otherwise free reverse mortgage information.
When this report came out in 2009, the growing number of seniors falling victim to these scams – which were collectively worth more than $4 trillion in home equity – was associated with program vulnerabilities, such as lack of credit from income or professional qualifications. This type of risk stratification has created significant opportunities for fraud perpetrators.
In early 2013, HUD issued a warning to reverse mortgage lenders to avoid steering potential borrowers to specific HECM advisory agencies. In some cases, lender representatives were present or even participated in counseling sessions. Some lenders have provided copies of borrower exam questions used by HECM advisors in advance.
Remember that even if lenders are required to provide a list of HECM Advisors in order to meet reverse mortgage advice requirements, lenders are prohibited from referring borrowers to specific advisors. The prohibition specifies in particular:
“The lender may not direct, direct, recommend or otherwise encourage a client to seek the services of a particular adviser or consulting agency. Lenders are required to give each client a list of HECM advice providers which includes national intermediaries providing telephone advice and five branches in the client’s region and/or state with at least one of the local branches located within a reasonable driving distance for face-to-face consultation. » [HUD Handbook 7610.1 Chapter 4-11]
In addition, lenders are prohibited from attending or participating in the counseling session. While the HUD handbook allows interested parties with an advocacy interest in the reverse mortgage, such as parents and attorneys, to attend the session with the borrower, the HUD guidelines specifically prohibit the representative from a lender to attend the session with the borrower.
Lenders are also prohibited from reviewing the issues or providing advice to the borrower. This interferes with the adviser’s role in providing information to the borrower. Moreover, it is not guaranteed that the information provided by the lender is correct or up to date.
Failure to comply with requirements outlined in HUD handbooks and mortgagee letters may result in referral to the Mortgagee Review Board for appropriate sanctions, including but not limited to civil monetary penalties, suspension and withdrawal of authorization to participate in FHA programs.
Other consumer protection concerns
Not all consumer protection concerns about reverse mortgages come from fraudsters and scammers. Like many non-traditional mortgage products, some of the most significant consumer protection issues stem from information asymmetry. In other words: reverse mortgages are complicated and borrowers don’t understand their terms.
In its 2012 report to Congress, the CFPB identified three major gaps in the reverse mortgage transparency:
- the nature of the increasing balance and decreasing net worth of reverse mortgages is difficult for reverse mortgage borrowers to understand;
- innovation and policy changes regarding reverse mortgages were not sufficiently explained and created confusion among consumers; and
- required federal disclosures on reverse mortgages provided inadequate guidance on the pros and cons of reverse mortgages.
Additionally, the relatively low barrier to obtaining a reverse mortgage has pushed seniors to take out a reverse mortgage at a younger age, sometimes even before retirement. This added to the risk that they would deplete their capital before they could plan for future health care or moving costs.
The CFPB found that instead of using reverse mortgage proceeds for day-to-day expenses in retirement, most reverse mortgage recipients (73% in 2011) withdrew all or nearly all of their capital to invest or save elsewhere. Often the investments didn’t pay as much as the borrower accrued interest on the reverse mortgage!
Another increasingly common practice is for borrowers to take out a reverse mortgage to refinance a traditional mortgage and avoid monthly mortgage payments. While this undoubtedly eliminated the borrower’s mortgage payments, the easy liquidity also threatened the borrower’s ability to plan for future costs. In some cases, reverse mortgage proceeds have been used to prolong unsustainable financial situations.
Reverse mortgage borrowers who withdrew all of their home equity were at higher risk of becoming tax and insurance delinquents, and therefore more vulnerable to foreclosure.