Beware reverse mortgage pitches Marketers can charge substantial fees, mislead older homeowners

Nation's Housing

March 16, 1997

WASHINGTON -- The slick telemarketing pitch to senior homeowners goes like this: May I send you, at absolutely no obligation, information on how you can turn your home equity into monthly income at no cost to yourself? The money will simply add to your income without affecting any other payment you may now be receiving, such as Social Security or Supplemental Security Income.

The pitch -- part of a new, fast-spreading campaign to market reverse mortgages and annuities -- is fraught with problems for homeowners 62 and older, according to consumer advocates specializing in helping older Americans. The "free information" is being offered by self-described "service providers," who charge seniors thousands of dollars for doing little more than referring their loan applications and personal financial profiles to mortgage lenders and life insurance agents. The unregulated service companies pocket 8 percent to 10 percent of any loan they produce for referral -- a cut that one consumer advocate described as "absolutely egregious."

"The [service provider] is just setting up referrals, but walks away with more money than anybody in the transaction," said Ken Scholen, head of the nonprofit National Center for Home Equity Conversion, an authority on reverse mortgages.

One of the hottest financial products of the 1990s for seniors, reverse mortgages allow owners to turn their home equity into cash without having to make monthly interest or principal payments. Under a reverse mortgage, the lender sends the borrower money via a credit line, a lump-sum payout or a monthly check. Generally, lenders don't receive their money back, plus interest, until the borrowers sell their houses or die.

Roughly 45,000 reverse mortgages have been closed in recent years, most through the Department of Housing and Urban Development's "Home Equity Conversion Mortgage." Private competitors include Transamerica Home First's "House Money" program, Household Bank's "Household" program and Fannie Mae's "Home Keeper" program.

Increasing numbers of lenders are entering the reverse mortgage arena, spurred by research suggesting the number of equity-rich seniors is huge and growing fast. A new study from Budd Lake, N.J.-based SMR Research Corp. estimates that more than 23 million American homes are owned free and clear of mortgage debt and that the average age of the owner of those houses is 64.3. More than 11 percent of all debt-free homes are owned by people 80 years or older, according to SMR.

Many of these senior owners are not only equity-rich but also cash-poor, according to SMR President Stuart A. Feldstein. They "often live on fixed incomes. They have cash needs, including much higher-than-average medical costs. But their incomes prevent them from getting conventional loans," he said.

Their economic situations make them ideal targets for fly-by-night telemarketing operations that obtain commercially available data on homeownership, mortgage debt and age, according to Scholen. The firms apparently change their names frequently or work through franchise arrangements. The real objective of the "service providers," said Scholen, usually is to persuade seniors to apply for large, lump-sum reverse mortgages and to invest most or all of the cash into annuities sold by insurance companies.

To avoid rip-offs, Scholen recommends following these rules: Never deal with a loan marketer who wants to talk about only one form of reverse mortgage -- typically a lump-sum payout. The most advantageous type of reverse loan for many consumers, according to Scholen, is often a credit line that need be drawn upon only when the senior needs cash.

Get independent advice on the quality and performance of any annuity you buy with reverse mortgage proceeds. The telemarketer "service providers" often direct consumers to low-rated, low-performance annuities that represent "terribly overpriced deals" compared with higher-rated annuities, according to Scholen.

Be aware that taxable annuity payments can reduce your cash benefits from -- or render you ineligible for -- government programs such as Supplemental Security Income, no matter what telemarketers might tell you. "You could lose your eligibility for Medicaid" by signing up for an annuity program in connection with a reverse mortgage, said Scholen.

For more information, call the National Center for Home Equity Conversion at 612-953-4474.

Pub Date: 3/16/97

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