Boomers boost reverse mortgages

As demand for reverse mortgages has soared over the past few years, so have the reports of heavy-handed sales pitches, misleading ads and gullible seniors’ being swindled out of their life savings.

Take Betty Adcock, an 80-year-old Salinas, Calif., homeowner who was approached in April 2006 about taking out a reverse mortgage, even though she says she didn’t understand what that meant.

She didn’t need the cash, already having access to a $150,000 home equity line of credit.

Nevertheless, Ms. Adcock agreed to the deal — a move that allegedly cost her at least $17,000 in closing fees and required her to make $5,000 in home repairs. Additionally, the salesman allegedly convinced her to convert $125,000 from a municipal bond fund that had been paying her a monthly income into a 20-year deferred annuity that wouldn’t pay her a cent until her 100th birthday.

“I was shocked,” Ms. Adcock’s daughter, Carol Anthony, said when she found out about the transaction a few months later.

“When Mom signed on the dotted line, she felt the salesman was a good friend, but he was not,” she said.

When the smoke cleared, the series of transactions, with their hefty fees, had removed about $165,000 from Ms. Adcock’s estate, according to Ms. Anthony.

“When Mom realized what the salesman had done, she became very depressed and all but stopped eating,” she said.

Ms. Anthony was able to buy back her mother’s home and resolve the annuity issue but wondered how many other seniors had been duped. So she took her story to the Senate’s Special Committee on Aging last December, where she pleaded with politicians to take steps to prevent this type of abuse in the reverse-mortgage market.

Ms. Adcock has a lawsuit pending against parties including the reverse-mortgage salesman, agent Sean Richard Daly of Daly Financial Group of Monterey County, Calif., as well as firms related to the reverse-mortgage transaction: Financial Freedom Senior Funding Corp. of Irvine, Calif., Consumer Credit Counseling Services of Ventura County Inc. of Camarillo, Calif., and Senior Freedom Corp. and U.S. Financial Mortgage Corp. both of Rocklin, Calif.

Michelle Minier, chief executive of Financial Freedom, said that her firm had nothing to do with the agent or the company that originated the reverse mortgage in this situation.

“The allegations made against Financial Freedom in this lawsuit are patently false,” she said. “We were not involved in the origination or working with the borrower.”

Ms. Minier said that her firm simply purchased the mortgage in the secondary market.

“We bought the loan after it was closed by the borrower,” she said.

When her firm originates loans, Ms. Minier said, agents aren’t permitted to sell or promote other financial tools, and if she discovered that one of her firm’s employees or even a partner didn’t respect the company’s practices, she said she would “absolutely terminate” the relationship.

The other parties named in the suit could not be reached for comment for this story.

When properly vetted, a reverse mortgage allows homeowners who are least 62 to convert the equity in their homes into cash without selling their property or taking on new monthly mortgage payments. Basically, the homeowners borrow against the equity in their homes, and the loans don’t have to be paid back until they move out or die.

If the borrower lives longer than expected and the loan, with its accumulating interest, exceeds the value of the property at the time of the sale, neither the borrower nor the heirs are obligated to pay more than the value of the house.

The program is ideal for cash-strapped seniors who are struggling to pay property taxes, monthly home maintenance bills, home repair bills or for basic living expenses. But it isn’t recommended for those who want to fund a lifestyle they can’t afford or to finance another investment.

Demand for reverse mortgages has grown since the federal government introduced the program as part of a pilot project in 1987, with the biggest surge coming in the past seven years.

There are two programs: the federally insured home equity conversion mortgage, which accounts for about 90% of the loans issued, and non-Federal Housing Administration programs.

SURGE IN SALES

The number of federally insured reverse mortgages issued grew more than tenfold to 108,293 loans last year, from 8,127 loans in 2001, according to the National Reverse Mortgage Lenders Association, a Washington trade group. During the first four months of this year, another 40,097 loans were originated.

And this trend is expected to continue. The first wave of baby boomers are turning 62 this year, and more than 70 million boomers will be crossing that threshold over the next 18 years, according to the Census Bureau.

The boomer generation, which is accustomed to refinancing, will likely be more open to reverse mortgages than the previous generation, which generally wanted “to burn the mortgage and celebrate when the house was paid off in full,” said John Rother, policy and strategy director at AARP of Washington.

Reverse-mortgage brokers see this as a huge, untapped market.

More than 80% of households that include a member who is at least 62 own their homes, representing about $4 trillion in equity, according to AARP. Yet only about 1% of the 30.8 million households that include a member at least that age use reverse mortgages.

High-profile actors such as James Garner and Robert Wagner can be seen pitching the products on national television ads, and new reverse-mortgage offices are sprouting up across the country.

Joe DeMarkey, director of corporate development at Everbank Reverse Mortgage LLC in Bloomfield, N.J., said that reverse mortgages are particularly attractive for those who wish to remain in their homes for the long term and need cash for skilled nursing help in order to do so.

‘VERY EXPENSIVE LOAN’

But Mr. Rother cautioned that reverse mortgages, with their hefty upfront fees that often exceed $15,000, can be pricey.

“It’s a very expensive loan,” he said. “People really shouldn’t do it unless there’s a really pressing need because other forms of credit are more than likely to be less expensive and more flexible.”

Ron Palastro, owner of R.S. Palastro Financial Planning Services Inc. in New York, which manages about $100 million in assets, sees the reverse-mortgage program as a good tool for certain seniors who need the cash to remain in their homes.

However, he said, the mass marketing strategies can mislead seniors into thinking they can get a windfall to go on spending sprees.

“Unfortunately, there are some abuses going on,” Mr. Palastro said.

The Financial Industry Regulatory Authority Inc., based in New York and Washington, issued an investor alert in March urging all homeowners over 60 to weigh their options carefully before signing up for a reverse mortgage. Finra warned seniors to be particularly wary of financial advisers who approach them to take out a reverse mortgage for the sole purpose of funding another investment.

“Some older Americans were being targeted,” said Geraldine Walsh, vice president of investor education at Finra.

Peter Bell, president of the National Reverse Mortgage Lenders Association, said the reports of abuse have been overstated.

“The issue is shoddy annuity sales,” not reverse mortgages, he said.

Mr. Bell said that certain unethical salespeople will always prey on seniors.

“They’ll go and find the senior that has money in [certificates of deposit] or other investments and get them to buy that annuity,” he said.

“People have this fear of outliving money, and so when these hucksters come along and offer them the promise of lifetime income, these seniors become susceptible to that.”

E-mail Janet Morrissey at [email protected].