Tapping Into Homes Can Be Pitfall for the Elderly

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Tapping Into Homes Can Be Pitfall for the Elderly

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Erika Baker was 67 years old, divorced and worried about her job when a saleswoman showed up at her door in late 2006.

A reverse mortgage, the saleswoman explained, would give Ms. Baker
instant access to hundreds of thousands of dollars tied up in the value
of her home. Such a loan, typically available only to homeowners in
their 60s and older, would not have to be repaid until Ms. Baker moved
out, the saleswoman said.

And if she never moved, the loan
would be settled by selling her house after she died. “Your Home Pays
You Cash!” read a brochure the saleswoman left behind.

Ms.
Baker, who lives just outside San Diego, jumped at the offer, borrowing
a little more than $200,000 through a company called Senior American
Funding.

Then the problems began. The saleswoman pressured her
to put the proceeds of the loan into complex investments that put her
money out of reach, Ms. Baker said. She received only about $33,000 in
cash, far less than she needed for her final years.

“I thought
this was a safe way to make sure I’d never run out of money,” Ms. Baker
said. “Then everything became so confusing. No matter where I turned
for help, it seemed like things got worse.”

As the United States
has become an older nation, reverse mortgages have grown into a
$20-billion-a-year industry, with elderly homeowners taking out more
than 132,000 such loans in 2007, an increase of more than 270 percent
from two years earlier. In surveys, many borrowers say reverse
mortgages have improved their lives and provided money they needed for
retirement.

But hundreds of people who have sought reverse
mortgages — in lawsuits, surveys and conversations with elder-care
advocates — have complained about high-pressure or unethical sales
tactics they say steered them toward loans with very high fees. Some
say they were tricked into putting proceeds of their loans into
unprofitable investments, while sales agents pocketed rich commissions.

“Every
scam artist is getting into this business,” said Prescott Cole, an
elder-care advocate who has worked with numerous reverse mortgage
borrowers. “Because reverse mortgages are so complicated and give you
money up front, years can pass before a senior realizes they’ve lost
everything.”

Reverse mortgage lenders and brokers dispute those
accusations, noting that the loans are heavily regulated and have
helped hundreds of thousands of people.

“For a lot of elderly
people, their only real asset is their house,” said Peter Bell,
president of the National Reverse Mortgage Lenders Association, a trade
group. “A reverse mortgage is one of the few ways someone can access
wealth that’s otherwise out of reach, while still living in their house
for as long as they want.”

However, some borrowers find their wealth is still out of grasp, even after they have sought a reverse mortgage.

For
example, Senior American Funding, the company that sold Ms. Baker her
loan, has been sued three times in the last 13 months by clients who
said they were misled. (Two of those cases were settled out of court
for undisclosed sums. The third, filed by Ms. Baker in California state
court last month, is pending.)

The company, which is licensed in 16 states, has originated mortgages worth more than $100 million since 2004.

“We
never pressure clients,” said one of the company’s founders, Matthew
Copley. “We just try to make sure they know about their options.”

However,
a former sales agent, Hani Shenoda, and an agent who still works at the
company who spoke on the condition of anonymity because of fear of
retribution, said in interviews that managers at Senior American
Funding encouraged them to pressure older homeowners into unwise loans
and investments. The company disputes that assertion.

On Tuesday,
after being contacted by a reporter, Senior American Funding announced
it would no longer sell combinations of loans and investments like the
one Ms. Baker had bought.

“When we make mistakes, we address them as responsibly as we can,” Mr. Copley added.

Ms. Baker owned a home worth about $600,000 but was living paycheck to
paycheck, teaching child-rearing skills to low-income mothers for about
$400 a week, when she was told in 2006 that her job was ending.

Months earlier, she had received a mailing from Senior American
Funding, one of the hundreds of reverse mortgage companies that have
emerged in the last several years. She scheduled an appointment with a
saleswoman named Laurie Spencer. (Ms. Spencer no longer works at Senior
American Funding, according to the company, and could not be located.)

“This
saleswoman was so friendly and personable,” Ms. Baker said. “It was
like God had sent me a friend to tell me how to survive.”

In the
kitchen of the home, where Ms. Baker displays watercolors of dolphins
and flowers she has painted, the saleswoman recommended a loan of
$218,900, with a variable interest rate initially set at 6.57 percent.

Because
reverse mortgages do not require borrowers to make immediate
repayments, the interest charges are added to the debt every day, and
the total amount owed grows over time. The saleswoman did not explain
that within 10 years, Ms. Baker’s $218,900 loan could grow to as much
as $400,000, Ms. Baker said. That debt would be paid by selling the
house when she moved out or died.

The saleswoman also did not
emphasize the high fees, Ms. Baker said. The loan’s fees cost her
$17,100 — almost 8 percent of the total loan — which was paid out of
the proceeds as soon as the loan closed.

To ensure that borrowers
know such details, the federal government requires them to speak to an
independent adviser before closing a reverse mortgage.

“We make
potential borrowers talk to a counselor to make sure they understand
what they are doing,” said Renée Shadel, an investigator with the
Washington state attorney general’s office. “These can be great loans
for some people, but only if they understand them.”

But critics
say these counseling sessions are often brief and unhelpful. Some
elderly borrowers, for instance, said their sessions lasted only 10
minutes, rather than the 60 to 90 minutes most counselors say they need
to explain the loans.

Critics say some sessions are so brief
because reverse mortgage companies are paying for the advice. One of
the largest reverse mortgage counseling companies, Money Management
International, often asks lenders to pay for providing advice to the
lender’s clients, according to a company spokeswoman.

Money
Management International, which is a nonprofit company, received
$900,000 from reverse lenders last year. By regulation, counselors may
not charge clients, though they are allowed to seek support from
lenders.

“Anytime anyone gives a counselor a donation, they
expect a quid pro quo,” said Buz Zeman, a reverse mortgage counselor
with Housing Options Provided for the Elderly, a nonprofit group
financed by government grants. “The point of counseling is to make
people consider other options. That’s difficult if you feel like your
next paycheck relies on convincing someone to get the loan.”

A
spokeswoman for Money Management International says it seeks payments
from lenders because government grants do not cover costs. The group’s
counselors educate clients only about how loans work and do not
recommend whether to proceed, she said, adding that the average time a
counselor spends with a client is 58 minutes.

“There is no quid
pro quo relationship with lenders,” a Money Management International
spokeswoman, Catherine Williams, said in an e-mail message, adding that
clients receive the same advice whether a lender pays for the session
or not. “Funding is not tied to the outcome of any case.”

Even
when lenders do not pay for counseling, it can still prove unhelpful.
Ms. Baker’s counseling session, which was provided by an agency that
does not accept money from lenders, lasted only about a half hour, and
she walked away from the conversation still confused, she said.

Then the saleswoman persuaded her to sign the loan forms.

After
the reverse mortgage closed, Ms. Baker used the proceeds to pay off a
$68,000 traditional mortgage on her home, and she put about $33,000
into various savings accounts.

The remaining $100,000 was used to
purchase, at the saleswoman’s urging, two deferred annuities — complex
contracts that offer monthly income in exchange for a large lump-sum
payment.

Those annuities prohibited Ms. Baker from gaining access to most of her funds for seven years unless she paid a stiff penalty.

Moreover, the annuities were likely to cost her money rather than pay
her. Annuities are so complex that it is impossible to forecast
precisely how much Ms. Baker will receive from them. However, based on
recent payout data for similar products, she will probably earn about
$520 a month from her annuities for the rest of her life. Ms. Baker’s
mortgage debt is increasing by about $600 a month as the interest
compounds on the money she used to purchase those annuities.

If Ms. Baker collected monthly income from her annuities for 10
years, she could receive $62,400. However, the debt she would owe over
that period would likely increase by $79,000 to $300,000, depending on
how her loan’s interest rate changed.

“Buying an annuity with the
proceeds of a reverse mortgage is incredibly dangerous,” said Mr. Cole,
a critic of reverse mortgages. Indeed, the practice is so troublesome
that many annuity companies and states either tightly regulate or
forbid it.

The salespeople at Senior American Funding were richly
rewarded for their sales: the company received about $8,750 in
commissions from Ms. Baker’s annuities, and $7,200 for processing her
reverse mortgage.

Last month, Ms. Baker sued Senior American Funding, accusing it of fraud and elder abuse.

Mr.
Copley, the Senior American Funding co-founder, defended the company’s
actions and said Ms. Baker consented to every transaction.

However,
Mr. Copley conceded that Ms. Baker was given documents with inaccurate
numbers and that sales agents, including him, at the time did not fully
understand the products they were selling her.

“If we made mistakes, I’m sorry,” he said.

Other lenders have also been accused of pushing older homeowners into unwise deals.

A survey released last year by AARP,
formerly known as the American Association of Retired Persons, of more
than 1,500 reverse mortgage borrowers found that almost one in 10 were
urged to buy other financial products, like annuities.

Lawsuits
against reverse mortgage companies, including the nation’s largest,
Financial Freedom Senior Funding, contend that those firms helped
pressure older Americans into bad investments.

In court filings, companies have denied those claims.

“Financial
Freedom is not involved in selling annuities, does not recommend
annuities, and won’t even allow borrowers to use reverse mortgage
proceeds to buy an annuity at closing,” said Joel Schiffman, the
company’s general counsel. “We only pursue a reverse mortgage when it
is in a senior’s best interest.”

Some regulators and lawmakers,
however, have said that more safeguards are needed, including giving
borrowers more information about alternatives to reverse mortgages,
disclosing fees more clearly and providing more government money to
counselors, so that they do not seek payments from lenders.

New
laws governing reverse mortgages are under consideration in Congress,
though lobbyists for some lenders are mounting strong opposition,
Congressional staff members say.

For Ms. Baker, now 68, such
safeguards would come too late. She says she wakes up in the night,
terrified there will not be enough money for food, gas or anything
else. To cut her grocery bill, she stopped buying meat and fresh
vegetables.

“Before, at least I knew my house was safe, and that
no one would take that away from me,” she said. “Now, I don’t know if
there is anything I can count on.”

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Source: www.nytimes.com