Although a reverse mortgage can be a beneficial financial tool, many unscrupulous individuals and brokers use them as a vehicle to steal from seniors who need money and/or don’t fully understand how they work.
Reverse mortgage fraud can cost homeowners thousands of dollars and/or their homes without them receiving any benefits from a reverse mortgage. The scams can take many forms; here are the most common:
Equity theft. This scheme typically involves several crooks who purchase a home that is distressed or abandoned, then obtain an inflated appraisal on the property. They resell the home to a senior and convince the buyer to take out a reverse mortgage to help pay for it. Only once the transaction is complete, the perpetrator(s) steal the reverse mortgage funds, leaving the senior with no cash and no equity on a property they likely cannot sell.
Foreclosure rescue. This tactic involves the dishonest parties specifically targeting seniors at risk of losing their homes to foreclosure. With the help of a dishonest appraiser, the thieves inflate the home’s value. The homeowner is then convinced to obtain a reverse mortgage. Only the scammers trick the owner into transferring the title to them and collect the reverse mortgage proceeds.
In another version of this scheme, the perpetrators coax the homeowner into applying for a reverse mortgage, then inform them they don’t qualify. To remedy the situation, the thieves convince the seniors to take out a traditional mortgage. During the closing, they transfer the title away from the homeowners.
Contractor fraud. This is a more simple type of fraud in which a contractor convinces a senior homeowner that their property is in dire need of repair. When the homeowner balks because of cost, the contractor pushes him or her into taking out a reverse mortgage to pay for the project. Usually, the contractor overstates the need for repairs, overcharges on the work, or convinces the senior to use a reverse mortgage when a home equity loan or another type of funding would be better financially for the homeowner.
Flipping fraud. This type of fraud typically involves a real estate agent who markets a property in poor condition that has been given just enough of a facelift to look presentable. The pitch to the senior prospects is that they can buy a relatively low-cost home with no money down using a Home Equity Conversion Mortgage (HECM) for Purchase loan. The agent then finds a way to divert some of the proceeds to themselves.
Diverting funds reserved for paying off the mortgage. Many seniors use part of their reverse mortgage funds to pay off their traditional mortgage, thus eliminating a large monthly payment. Unfortunately, there have been instances in which an unscrupulous mortgage broker or title company has diverted the funds meant to pay the home mortgage into their own pockets. Unfortunately, seniors don’t find out until it’s too late, usually when their original lender contacts them to collect on past due payments.
In some cases, a con artist tricks the homeowner into signing documentation that enables the crook himself to apply for the reverse mortgage on the victim’s home, then disappear with the reverse mortgage proceeds once they’re paid out.
To avoid being a victim of a reverse mortgage scam, the FBI offers the following tips:
- Do not respond to unsolicited reverse mortgage advertisements or offers.
- Be suspicious of individuals making claims that sound too good to be true, such as buying a home with no downpayment or getting “free money” from your home.
- Do not sign anything that you do not fully understand.
- Seek out your own reverse mortgage counselor.
- Enlist the help of an FHA-approved lender.