WASHINGTON — With the housing market in decline, unscrupulous sales agents are popping up in the booming reverse mortgage industry, where reports of deceptive and high-pressure sales tactics are worrying lawmakers and consumer advocates alike.
Both say thousands of older Americans could be steered into inappropriate loans, just as millions were lured into now-shaky sub-prime loans. Their solution? Better loan counseling and stronger government supervision and regulation.
"We have gone through a savings and loan collapse, a stock market bubble and are currently in the middle of a lending mess. Our goal is to make sure that the reverse mortgages don't become the scandal of the next decade," said Sen. Claire McCaskill, D-Mo., said at a hearing this week before the Senate Special Committee on Aging.
Reverse mortgages typically allow homeowners who are 62 and older to borrow against their home equity without having to repay the money until the home is sold or the borrower dies or permanently moves out. The older the borrower and the greater the value of the home, the more money that can be borrowed.
Ninety percent of reverse mortgages are issued through the federally insured Home Equity Conversion Mortgage program. The number of HECM loans issued annually has grown from 157 in 1990 to more than 76,000 last year. Lenders expect to issue more than 214,000 loans this year.
Most agree that reverse mortgages, used properly, can provide cash to help seniors live more comfortably. In fact, the Senate on Friday passed bipartisan legislation that removes the cap on the number of reverse mortgage loans that the Federal Housing Administration can insure.
But as the popularity of reverse mortgages grows, the industry is proving fertile ground for predatory lenders, loan agents and brokers who see older, cash-strapped borrowers as easy pickings.
Peter Bell, president of the National Reverse Mortgage Loan Association, said he doesn't believe the problem is widespread. But he conceded that sales agents left jobless by the housing crisis are migrating to the reverse mortgage industry and may "have a different type of mentality about moving transactions through quickly."
More than 12.5 million seniors ages 65 and over own their homes with no mortgage debt, representing more than $4 trillion in home equity. Those numbers will only increase as the first of nearly 80 million baby boomers born before1964 begin retiring in the next few years.
Bell said empathy for the customer is the most important quality for long-term success in the reverse mortgage industry. "The motivation has to be pure," he said.
In committee testimony, however, Prescott Cole, a lawyer from San Francisco, said some sales agents seeking larger commissions are wrongly advising seniors to buy tax-deferred annuities with their loan proceeds.
Deferred annuities are a popular retirement savings vehicle but are not always the best choice, especially for older seniors, according to experts.
In one case, a 92-year-old man put $650,000 in a deferred annuity and died two years later, Cole said. But because the annuity didn't mature until 2063, the dead man's family had to pay a $150,000 fee to break the contract and access the money, said Cole, who works on behalf of the national Coalition to End Elder Financial Abuse.
"Long-term annuities are almost always inappropriate for seniors, as they can tie up retirement savings far beyond one's life expectancy," said Sen. Herb Kohl, D-Wis.
The nation's largest provider of reverse mortgages, Financial Freedom Senior Funding Corp. of Irvine, Calif., is at the center of the controversy due to several lawsuits that claim borrowers were steered into inappropriate loans and annuities by sales agents and insurance brokers working in concert.
In one lawsuit, San Francisco attorney Ingrid Evans is seeking class-action status on behalf of Mary Munoz, a 79-year-old Los Angeles woman who claims she was advised to take out a $209,000 reverse mortgage from Financial Freedom in 2004.
Munoz later purchased $80,000 in annuities, which she was told would be used to pay off the reverse mortgage when she died. Months later, Munoz was forced to withdraw more than $26,000 from the deferred annuity in order to make home repairs required under terms of the reverse mortgage. The withdrawal triggered penalties that Munoz claims she was not aware of when she purchased the annuity.
The suit claims that excessive fees, penalties and other costs effectively depleted Munoz's equity in her property and that thousands of other borrowers across the country have had similar experiences.
Representatives of Financial Freedom would not comment on the litigation, except to say they believed the allegations were "baseless and without merit."
After declining an invitation to appear before the Senate subcommittee, Financial Freedom's general counsel Joel Schiffman said in written testimony that the company provides annuity disclosure information about combining annuities and reverse mortgages, but "does not offer, endorse or recommend the purchase of any other financial or insurance product or service."
While loan counseling is required on federally insured reverse mortgages, it is insufficient by many accounts. Individual counselors get no specific training and instead of helping borrowers determine if a loan is appropriate, they only make sure that borrowers understand the loan's terms, said Cole.
"The funding is severely inadequate," said Meg Burns, director of single-family programs at the Federal Housing Authority.
On Friday, McCaskill and Kohl introduced legislation that would increase federal funding for reverse mortgage loan counseling. The bill also would bar sales agents from acting as loan counselors.
ON THE WEB
A new report on reverse mortgages by AARP.