There is a new scam out involving reverse mortgages that everyone
needs to be aware of as it doesn't affect just
senior borrowers. It seems that in their effort to
constantly find a way to beat the system, there are some who are
looking for ways to use senior borrowers and reverse mortgages to flip
properties. Most reverse mortgage lenders have caught on
to the scheme and have added seasoning requirements to
HUD's underwriting criteria to avoid these schemes,
but that has not stopped the unscrupulous few from taking a program
meant to help senior homeowners access the equity in their homes and
turning it into yet another means for quick cash.
Here's how it works:
An investor or group of investors buy foreclosure or rehab homes at
below market prices. Since there are not a lot of quick
buyers in today's market, these seekers of quick
cash have started trying to use seniors in their scam. They arrange for a bogus sale to the
senior, and then because HUD had no seasoning requirements, (in other
words, there was no minimum timeframe required between the time a
senior to buy a home and the time they could take out a reverse
mortgage refinance) these scam artists then arranged for a reverse
mortgage for the senior an inflated value to enable the senior to
qualify for the reverse mortgage.
With the reverse mortgage proceeds, the investor or the group of
investors are taken out of the transaction with a nice profit and the
senior receives a home with no payment so everyone wins,
right? Wrong! These loans are insured by the
Federal Housing Administration (FHA) and often sold in the secondary
market to the Federal National Mortgage Association. The
Home Equity Conversion Mortgage (HECM or Heck-um) reverse mortgage program was
approved by congress and signed into law by Ronald Reagan to allow
senior homeowners access to their equity so that they could age in
place, while never having to make mortgage payment. These
straw borrowers have no built up equity and no demonstrated ability to
maintain the property or to pay the taxes and insurance. The premise behind the reverse mortgage is much the same as insurance
programs in that with certain equity positions and actuarial tables
with borrowers ages, the borrower, the
borrowers heirs and the government should be
protected against losses. When these parameters are upset
by fraudulent circumstances, the safeguards are not there.
When we read about the greed on Wall Street and we hear about what
actions lead to bail-outs, etc., this is exactly the type of greed and
shady dealing that threatens Americans today. These few
who are looking for the quick buck are putting seniors at risk by
attacking a program meant to help them and twisting it. They also are not helping the seniors who they put into these homes who
really can't afford to pay for the maintenance,
taxes and insurance. And finally, when we hear numbers
like $700 Billion for bailing out people who did risky programs, etc.,
one has to ask how much of that number includes outright fraud and how
much of future losses the greed of these scammers will
cost?!
Individuals who are approached by people claiming to be using a
take-out strategy of reverse mortgages for rehab or foreclosure
properties, knowing that the seniors who will be deeded onto title will
also sign a Quit Claim Deed up front so that if the scheme does not go
through the seniors can be easily removed from the property at a later
date, should know that this is fraud. When people finally
realize that, like all fraud, everyone loses, one can only hope the
prosecutors and the FBI follow the money trail and the sales history to
implicate all who have been involved.
7 Comment(s)
jerry stussman
10/1/08 5:13am
I don't see the problem! A senior is presently renting for $600/mth. An investor buys a home which legitamately appraises for $120,000, paying 60k cash and adds another 10k cash in improvements. He sells it to the senior for the amount the senior qualifies for (about $85k). The investor grosses $15k. Because of seasoning he must wait 6 months for this "profit" The senior has the dignity of homeownership in a home occupied by himself and family members. His monthly is reduced from $600 rent to taxes and insurance about $250 in California and he gets an immediate 35k equity. A neighorhood goes from row after row of foreclosures to families. As an investor, I'm considering doing just this for 100 homes in 2009 but find the risk associated with the $70k investment, the effort to find a senior an appropriate property, management of the fix-up, etc, etc, just not worth it! I see only benefits to the senior and the community, especially since the homes which qualify (make me a profit) are in rundown parts of town, If I proceed, I will have the senior inspect the home/neighborhood before I put $70k at risk I don't want empty houses or renters with no pride of ownership! If I don't proceed another 100
Michael Branson
10/1/08 2:40pm
It sounds great from that prespective, but let's take a look at the program, its intentions and the effects of what you propose. It sounds great, sounds like they get a home with immediate equity but the truth of the matter is, the reverse mortgage program was designed for seniors who currently own a home and are already maintaining that home, paying taxes, insurance and upkeep on that home. The reverse mortgage either gives them access to their equity or retires existing debt making this even easier, Your scheme takes a senior and places them into a home with 100% financing (something a reverse mortgage was NEVER intended to do) and relies on secret deeds and deals to hide the true nature of the transaction from the lender or the loan would not be approved in the first place. I don't know how you intended to get your seniors into the homes to make the lender believe that the senior had been there all along while never having received a dime in down payments from that "buyer" , but most of these scams relied on the seniors signing Quit Claim Deeds so that if the reverse mortgage did not go through, the investor could record the Deed and quickly toss the senior "buyer" back out on the street. This term, "buyer", is also a loose term since these "buyers" never buy the homes, they are given to them based on the money you can get from the reverse mortgage lender - and that opens a whole new can of worms. Investors know that the older a borrower is, the more money they qualify for under the reverse mortgage loan so again they prey on older individuals even less likely to be able to maintain all the covenants of a reverse mortgage. And most homes that "legitimately appraise for $120,000" do so because that is their true value and can be sold for $120,000. HUD would not condone appraisers who did not reveal properties whose appraised value was over-stated by 41% which would be based on the actual purchase price paid to the investor for the home.
With the passage of H. R. 3221, reverse mortgages will now also be available for purchase transactions...but only with full disclosure and only up to the maximum allowable limits set forth by HUD. The safegards built into the program insure that we don't get into another bailout scenario for reverse mortgages. Your circustances don't outline another 100 families who realize the American Dream of home ownership but rather another situation of an investor looking to turn a quick profit on 100 homes by twisting a government program and defrauding lenders. It's situations like this that take a viable program fro senior homeowners and put it at risk for the sake of looking for that qick profit that "you don't have to wait 6 months for". I'm sorry Jerry, I just don't agree with you. Anything that requires you to conceal the true nature of the transaction from the lenders and from HUD to get it done is shady at best and constitutes outright fraud, done in the name of greed not "helping to achieve the American Dream" and is exactly what got this nation is the position it is in today.
Donovan Brown
10/14/08 2:24pm
Hey Guys, I just ran across this this afternoon and noticed there were no posts and I believe I know why however I wanted to write the following;
Micheal,
It seems as if you are very concerned about fraud and that is a good thing however I do not believe you thoroughly read Jerry's statement. If you did then you did not comprehend it. I cannot and will not speak of his intentions as I do not know what they are, however he clearly indicates the appraisal is to be "legitimate". You went off on a rant about fraudulent value, etc. which shows you did not take the time to actually READ the words in his statement. I believe Jerry would need to explain more of how he intends to protect his investment which would help reveal his true intentions but throwing him under the bus for trying to figure out how to make a program be "win-win" for everyone, should that be his true intention, is not a bad thing. Just because a program was not originally designed for a particular type of transaction does not mean it should not be allowed. Scrutinized? Absolutely! Thrown out with the dishwater? Never! Unless I am mistaken the Lender would be considering a funding at a legitimate Loan to Value of <70%. This is getting near the qualifications of Hard Equity or Private Money Lending standards which are the most stringent of all if and when that stream of money is even available! How does giving a Senior a $35,000 legitimate equity position in a home that is costing the same or less than they pay for the humility of rent hurt that Senior? I beg you to explain. Especially if the home allows for a family care giver to live with them more comfortably. Am I missing something here. We should already have a program like this to help our Seniors. Don't call it a "reverse mortgage" call it something else. WRC! If it works then put it under Subchapter 1661661 or whatever and get it working.
Why don't you spend your time and efforts, and your money if you have any, toward making the Jerry's of the world toe the line and make sure everyone comes out ahead? You should start over and read his comments again and question him rather than rant uncategorically.
Unless you know him personally and what his true intentions were or are, I would suggest you apologize for your words that are not based on ant fact(s) but a diatribe of misplaced agression. Nothing personal here as I do not know you however I do respect and agree with what you said but feel it may have been grossly misdirected to the wrong party.
Smart thinking, inventive adaptation, and creative change has always been largely paramount to the success of our great country and to put that down without any thorough analysis is just ignorant.
Please, in the future reinvest your time and consider your thoughts before you trounce on someones idea.
I will answer any comment from you provided you actually read what I wrote.
George
11/20/08 3:34pm
I think senoirs SHOULD be able to downsize to a new home and immediately put a reverse mortgage on it.
there is no fraud or anything bad about that as long as the seniors are the ones actually 100% owning and buying and living in the home that the buy.
reverse mortgages SHOULD be able to be used to allow Seniors to downsize to a lower appraised home in a different market where they will have MORE equity after they sell their old home and thus be able to have higher reverse mortgage payments tot hem.
what you describe is wrong only if
1. someone is inflating appraisals of the newly purchased home which is fraud anyway no matter what type of mortgage there is (and the lenders require very good tough appraisals based on recent sales in falling markets so it is hard to do
or
2. if the people buying the home is not really a senior who will live in it for at least 6 months out of the year.
if a senior can sell a 200,000 home with 50,000 in equity and move to a different market where homes are only 100,000 then they immediately have 50% equity in the new home and should be able to get a reverse mortgage.
Why not?
It is actually better for every one.
with higher equity in the new home their is less risk to the lender, it props up the housing markets in the lower priced areas that may have suffered decreasing prices by bringing in new buyers to that market.
it's great for everyone!
what you are talking about is fraud which is bad with any mortgage type and has NOTHING TO DO WITH HECM's.
Stop bad mouthing them with false "scams".
Lopushaven
1/16/09 12:33pm
I have a client who bought a home for his mother at a low price and did a lot of improvement and construction making it a nice little house for her to live in. He quit claimed it to her and She applied for a HECM now she can't get one because of the seasoning. I don't think that much thought has been put into this requirement. The home was a wreck purchased for 35k after 6 months of work it appraised at 100k That is not a scam it is home improvement. If this loan could go through everybody does win. The mother has a nice home to enjoy her senior years, the neighborhood benefits by a dilapidated house now being made into an attractive property. Some construction workers and helpers made some money that they will spend into the local economy. Building suppliers sold some material. If more of these loans where done the property values in the whole area would improve which would build wealth for the entire community, not to mention making the current loans on houses in the neighborhood better assets for the current lien holders. Many of which are FHA insured so this helps the governments position as well since they would lower the risk on currently insured debt having an overall positive effect on the markets both real estate and financial. Maybe then someone in the community can take out a HELOC and go to a store and buy something. Then the store might hire someone. Who are you to say the taxes won't be paid? If we follow that logic no one could ever buy their first house! And a quit claim required up front in the "scam" you described wouldn't be legally binding if it was not in the purchase agreement anyway as it was done before the sale. After the sale the senior would have no reason to sign it. The economy is a team effort. Capitalism is a social organism that works because we all need each other.
So there mister CEO
Kevin
4/15/09 4:15pm
Lopushaven
What's so bad about waiting 6 months?
djnash
11/16/10 11:17am
Basically, I think the Reverse Purchase Program is good for deserving seniors; however, I am wondering how can one participate in the program, if they do not own a home?
Also, I would like to know how would one be affected by a foreclosure or foreclosures if they applied to be accepted into the Reverse Mortgage Program. Would a foreclosure limit or deny one's acceptance for participation in the program?
I am considering applying for the merits of the program for seniors.
Please provide info regarding the issues cited in this request.
Thank you.
Jeanie
All Reverse Mortgage Company
5 out of 5 stars
based on 65 ratings.
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