Reverse mortgage abuses tied to annuity cross-sales

Helen Hagan, an octogenarian and former real estate agent who lived in Paradise Valley, the “Beverly Hills” of Scottsdale, Ariz., found out the hard way that reverse mortgages can be problematic.

She attended a workshop in early 2004 on reverse mortgages and had the right background to assess whether buying one would be a good deal, according to her financial adviser, Michael Black.

But within a few months, Ms. Hagan had enlisted him to help disentangle her from a deal. Several insurance agents had sold her an equity index annuity and a life insurance policy that didn’t meet her income needs, according to the analysis done by Mr. Black, owner and senior adviser for Michael Phillips Black Wealth Management of Scottsdale, which manages $75 million.

Ms. Hagan’s situation epitomized reports of problems with cross-selling inappropriate products, particularly annuities, to seniors who take out reverse mortgages to tap their home equity for living expenses.

“The reverse mortgage was a tool to get the annuity sale,” said Mr. Black, who acts as an expert witness in securities and insurance litigation in addition to being a financial adviser. “Reverse mortgages are being oversold, not explained well and sold to the wrong people.”

Ms. Hagan wasn’t available to comment.

While she had converted the reverse mortgage to a traditional mortgage early on, the agents, Mark Reeves and Bill Bergh, had still persuaded her to purchase the annuity and the insurance policy, Mr. Black said. The transactions had been conducted through Columbus Life Insurance Co. of Cincinnati, Monumental Life Insurance Co. of Cedar Rapids, Iowa, and Wells Fargo Home Mortgage of Des Moines, Iowa, a division of Wells Fargo Bank NA of San Francisco.

Although Ms. Hagan’s living expenses were $10,000 a month, the annuity paid just $8,000 a month, and she needed another $3,000 a month for the new mortgage payment, Mr. Black found after he reviewed the transaction. “Their plan was flawed from the beginning,” he said.

REVOKED LICENSES

Erin Klug, spokeswoman for the Arizona Department of Insurance, said licenses for two of the insurance agents involved in the transaction, Mr. Reeves and Mr. Bergh, were revoked in 2006 and 2003, respectively. In 2004, Mr. Reeves was convicted of theft in Arizona Superior Court, she said.

A third insurance agent involved in the transaction, Robin Bergh, is Mr. Bergh’s wife, according to Mr. Black.

Columbus Life didn’t return a call seeking comment.

“We are aware of the issues raised by [Ms.] Hagan in 2004 regarding her annuity purchase. The matter was resolved quite some time ago. Due to privacy laws, we’re not able to discuss the specifics of a customer’s policy with us,” said Monumental Life spokeswoman Cindy Nodorft.

Wells Fargo Home Mortgage declined to comment on the case “because of pending litigation,” spokeswoman Debora Blume wrote in an e-mail.

Problems with cross-selling inappropriate products such as annuities or long term care insurance policies to seniors who take out reverse mortgages have caused enough concern that a provision was added to the Housing and Economic Recovery Act of 2008 restricting such practices. The law, signed July 30 by President Bush, provides $3.9 billion in funding to help about 400,000 borrowers keep their homes.

The provisions apply to the Federal Housing Administration’s home equity conversion mortgage program, which is responsible for about 90% of the reverse-mortgage market in the United States.

Under the program, mortgage lenders are now prohibited from requiring that a reverse-mortgage recipient buy insurance, annuities or any other products in order to get the mortgage.

Under the new law, financial companies must also institute “firewalls” to prevent the cross-selling of reverse mortgages with other financial products, loan limits for reverse mortgages were raised, and more funding was provided for counseling consumers seeking reverse mortgages.

The provisions were authored by Sen. Claire McCaskill, D-Mo.

“Sen. McCaskill’s approach is, reverse mortgages are not bad, but we need to make sure that protections are in place so seniors know what they’re getting into,” said Maria Speiser, a spokeswoman for the senator.

Last year, about 105,000 reverse mortgages were issued in the United States, according to Peter Bell, president of the National Reverse Mortgage Lenders Association in Washington. Those figures are up 10% so far this year, he said.

“There’s a lot of concern” about cross-selling annuities and other products with reverse mortgages, Mr. Bell said, “but there have not been a lot of incidents.” He said that the industry supports counseling for those who buy reverse mortgages to ensure that they understand the financial transaction adequately.

In a statement issued in July by the American Council of Life Insurers in Washington, the trade association said it supports “strong laws and regulations that protect seniors from being misled in connection with reverse mortgages.”

However, “we should not make it difficult for them to get the products that they may want and need,” said the ACLI, which pledged to work with the Department of Housing and Urban Development as regulations are developed to implement the provisions.

Annuities and LTC policies are “almost always not appropriate for somebody who’s taking out a reverse mortgage,” said David Certner, director of legislative policy, government relations and advocacy for the 40-million member AARP in Washington, which represents people 50 and older. AARP supported the provisions in the housing bill.

“This is a high-cost product that’s providing you a stream of income,” for living expenses or medical needs, Mr. Certner said. Annuities, which are also costly, are also intended to provide income, he said.

“You’re basically paying twice for your stream of income,” Mr. Certner said.

But reverse mortgages “could potentially be an important market in the future” for seniors, he said. “People are getting to retirement in many cases with not enough assets to live on, and people like to remain in their own homes,” Mr. Certner said.

SOMETIMES A GOOD CHOICE

Many seniors have full equity in their homes, and the homes have increased in value during the time they have owned them, he said. Reverse mortgages can be a good choice “for people who are older and cash-poor but home-rich,” Mr. Certner said.

Some financial planners also see the potential benefit of reverse mortgages for their clients.

Charles Stanley, a certified financial planner, advised a client who was in her mid-60s and had asked for advice about taking a reverse mortgage on the large home where she housed her extended family. She wanted to use the proceeds from the reverse mortgage for living expenses. Initially, he advised her to sell her large home and buy something smaller.

“But she would have had to destroy the important things in her life — the people,” said Mr. Stanley, who is a wealth manager with Capital Financial Advisers LLC of San Diego, which manages $250 million.

The woman decided to take out a reverse mortgage instead, he said.

E-mail Sara Hansard at [email protected].