"Tapping Into Homes Can Be Pitfall for the Elderly"
The New York Times
By Charles Duhigg
Published: March 2, 2008
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.”