The extent of the problem of predatory lending in this country is staggering. A hearing conducted by Senator Claire McCaskill showed that lenders are engaging in predatory targeting of seniors with reverse mortgages. They promise them that they will be able to help them with expenses such as making needed home repairs. But in many cases, the repairs are not made, the seniors are not given all of the information that they need to make an informed choice about taking out a loan, and lenders are making loans that they have no business making.
A GAO report on reverse mortgages found the following:
HECMs can provide borrowers with multiple benefits, but they also have substantial costs and are relatively complex. HECMs allow seniors to convert their home equity into flexible cash advances while living in their homes. Additionally, the borrowers or their heirs can fully pay off the HECM by selling the home, even if the amount owed exceeds the current home value. However, HECMs also have large insurance and origination costs. Furthermore, the long-term financial implications of a HECM can be difficult to assess because the borrower’s remaining home equity depends on the amount of cash advances and interest rate and house price trends.
In other words, the last sentence is the key -- the fact that long-term financial implications can be "difficult to assess" means that people are vulnerable to exactly the kind of dishonest marketing tactics that led to the Housing Bust as well as the boom and bust mentality that was characteristic of the Bush years.
Various federal agencies have responsibilities for protecting consumers from the misleading marketing of mortgages. Although these agencies have reported few HECM marketing complaints, GAO’s limited review of selected marketing materials for reverse mortgages found some examples of claims that were potentially misleading because they were inaccurate, incomplete, or employed questionable sales tactics. Federal agency officials indicated that some of these claims raised concerns. For example, the claim of "lifetime income" is potentially misleading because there are a number of circumstances in which the borrower would no longer receive cash advances.
The fact that these federal agencies are getting few complaints does not mean that there are no problems, but that they are not doing the oversight needed in the first place. In other words, the right-wing mentality that government is the problem is alive and well -- do as little as possible because the markets will correct any imbalances. Predatory lenders are thus free to engage in exploitation of our seniors and our federal agencies can plausibly claim that there are no problems, since they perform no oversight and receive no complaints. See the following sentence:
Federal agencies have had a limited role in addressing concerns about the sale of potentially unsuitable financial products in conjunction with HECMs ("inappropriate cross-selling"). For example, an annuity that defers payments for a number of years may be unsuitable for an elderly person. HUD is responsible for implementing a provision in the Housing and Economic Recovery Act of 2008 that is intended to restrict inappropriate cross-selling, but the agency is still in the preliminary stages of developing regulations. Some of the states GAO contacted reported cases of inappropriate cross-selling involving violations of state laws governing the sale of insurance and annuities.
Some state laws are much more stringent according to this report, meaning that part of the solution starts at the grassroots level -- electing state legislators who will pass such laws and attorneys general who will enforce them. Some of the strongest voices against corporate abuse of power during the Bush years have come from the state level and not the federal level.
HUD's internal controls do not provide reasonable assurance that counseling providers are complying with HECM counseling requirements. GAO's undercover participation in 15 HECM counseling sessions found that while the counselors generally conveyed accurate and useful information, none of the counselors covered all of the topics required by HUD, and some overstated the length of the sessions in HUD records. For example, 7 of the 15 counselors did not discuss required information about alternatives to HECMs. HUD has several internal controls designed to ensure that counselors convey the required information to prospective HECM borrowers, but the department has not tested the effectiveness of these controls and lacks procedures to ensure that records of counseling sessions are accurate. Because of these weaknesses, some prospective borrowers may not be receiving the information necessary to make informed decisions about obtaining a HECM.
In other words, there is a question of whether HUD people are acting in the best interest of the people, or they are simply serving as salesmen for the Reverse Mortgage Industry. It is very important that there are no ties whatsoever between the lending industry and HUD, just like it is important that the chair of the Huckabee/Palin campaign in 2012 not count the votes in the next election. This statement raises a lot of unanswered questions about whether there are conflicts of interest that are preventing the HUD from doing its job of protecting seniors against predatory lending practices.
Senator McCaskill, in her remarks at the hearing she conducted, stated that lenders are trying to get their hands on the more than $4 trillion in assets that our seniors have:
Ten thousand baby boomers become eligible for a reverse mortgage every day. 81% of them own their homes. These seniors are sitting on $4 trillion in equity. That equity is of great interest to some mortgage entities – unfortunately, not all of them have the best interests of the seniors involved in mind, but rather just profit at any cost. When it comes to our nation’s seniors, this is a particularly troubling position.
And this sort of exploitation is deliberate:
Among the predatory practices we are learning about are misleading advertising directed out our seniors using mailing lists whose titles tell us all we need to know about who their targets are: I’m talking about names like - "suffering seniors" and "elderly opportunity seekers".
She continues:
What is also deeply concerning is that Congress continues to add to the patchwork rules governing the reverse mortgage program. Under the Housing Economic Recovery Act of 2007, reverse mortgage loan limits were raised from $362,790 to $625,000, making senior’s even more lucrative targets for scammers. Further, the "Mortgage Reform and Anti-Predatory Lending Act," recently passed in the House of Representatives, could exacerbate the problem because it shockingly excludes Reverse Mortgages nearly 10 times from tighter duty-of-care standards for originators, Truth in Lending requirements, consumer fraud protections and prohibitions on predatory practices.
We have also been made aware of problems with the manner in which loan balances and servicing fees are calculated – in effect, servicers pile on fees that are complicated for seniors to understand and that they may not have seen coming when they decided to obtain a reverse mortgage. There are also concerns that what are known as "Yield Spread Premiums" are padding the pockets of lenders while reducing the equity available to seniors and driving up the tab for which HUD could ultimately be responsible.
And the problem is that much of this is legal. Legislators, of course, rationalize all this by saying that they need to do what the lenders want because if they don't, thousands of jobs will go out the window. But the problem is that we are talking about people who are knowingly exploiting our seniors. It is appalling that these people can have jobs and steal money from our seniors with impunity while our prisons are lined with so-called "illegal" immigrants and people who use pot. The reader can judge for himself who the real criminals are. The shocking thing about our justice system is that the more people we are able to scam, the more we can act with impunity.
There is, of course, a code of ethics that reverse lenders are required to follow. However, voluntary standards don't do any good when there are no consequences for stealing from seniors. The National Reverse Mortgage Lenders Association may have a comprehensive code of ethics that all members must follow; however, they do not have any enforcement powers beyond their ability to no longer consider violators members. These codes of ethics have to have the force of law behind them, or they will have no meaning whatsoever. That is just like our Constitution; for instance, the First Amendment will have no meaning whatsoever if the government does not seek to uphold Free Speech.
Peter Bell of the National Reverse Mortgage Lenders Association seeks to minimize all these problems in his testimony:
We have been polling state attorneys general offices, bank regulators and FTC and found the incidence of complaints about reverse mortgage lenders to be minimal or non-existent. We received a similar response to an inquiry to the Conference of State Banking Supervisors. Several weeks back, I had the opportunity to address a conference of the chief consumer complaint officers from all of the federal bank regulatory agencies, including the FRB, OCC, OTS and FDIC, as well as several state regulators, hosted by the Federal Reserve Bank of Kansas City. When asked during a panel discussion, the representative of each agency reported that they had few, if any, complaints about reverse mortgages.
But most people who are the victims of predatory loans don't know where to turn; therefore, the FRB, OCC, OTS, FDIC, and state regulators don't get very many complaints and thus don't see reverse mortgages as a problem.
Ann Jaedicke of the OCC testifies about the risks and benefits of reverse mortgages:
Like home equity loans, a reverse mortgage provides a homeowner with access to cash secured by his or her home. But unlike a traditional mortgage, a reverse mortgage does not require the borrower to make payments on an ongoing basis. Instead, the home itself is the primary source of repayment, and no repayment is required until the homeowner dies, permanently moves out of the home, or fails to maintain the property or pay property taxes or insurance. In addition, the loan is usually non-recourse, with the amount the borrower owes at repayment generally capped at the value of the home.
As Comptroller Dugan noted in his recent speech and as you will no doubt hear from other witnesses at this hearing, the reverse mortgage product can, if not managed appropriately, raise significant consumer compliance concerns. One substantial risk arises from the ability of elderly consumers to access their home equity through immediate and large lump sum payments. Although some consumers may choose a lump sum payment to pay off their existing mortgage, others may choose this option for medical expenses, home improvements, or vacations. Accessing a substantial amount of cash may leave some consumers vulnerable to unscrupulous lenders or other bad actors who may attempt to aggressively market investment, insurance, or annuity products or, worse, try to condition loan approval on the purchase of such products. Reverse mortgage borrowers also may fall victim to con artists who may persuade them to obtain reverse mortgages and to use the proceeds to pay upfront for unneeded or excessively expensive home repair services that may not be completed.
In other words, a reverse mortgage industry, managed properly, is a good thing -- it gives older homeowners who may pay thousands of dollars of property taxes on their homes access to money to pay them. However, the risk involved is that in return for access for up to $600,000, homeowners must pay a lot more -- such as insurance that they would not have had otherwise as well as repair costs. In other words, if someone takes out a reverse mortgage on a home and then it burns down, then how will the owner be able to pay back the lender, since they will "permanently move out of the home?"
Daniel Claggett of Legal Services of Eastern Missouri, testifying on behalf of the National Consumer Law Center, explains the need for the government to act proactively on this:
The National Consumer Law Center will be releasing a report in the coming weeks that will detail needed protections and improvements in the reverse mortgage market. These recommendations will include:
• Strengthening borrower counseling, which to date remains inconsistent and underfunded.
• Banning yield spread premiums, which incent brokers to make loans more profitable for lenders and investors at the expense of borrowers.
• Regulating proprietary reverse mortgages, which are developed and sold by private financial institutions. While the use of these products has slowed to a trickle, economic recovery over the next few years is likely to reinvigorate proprietary reverse mortgage products. To date, they remain almost entirely unregulated at the federal level and subject to widely varying state regulation.
• Improving data collection on reverse mortgages and other equity conversion products that are not currently reportable under the Home Mortgage Disclosure Act.
Lastly, and most importantly, a suitability standard for reverse mortgage products must be created. Seniors frequently depend on lenders, brokers and other third party intermediaries for guidance through a market that offers multiple distribution channels, a welter of "educational" resources and many complex products and financial choices.
Brokers and lenders often use impressive sounding credentials to imply special knowledge and expertise. But because mortgage loans are considered business transactions where each party ostensibly protects its own economic interests, in most states brokers and lenders owe no fiduciary duty to borrowers, and when problems arise brokers and lenders disavow any relationship of trust and confidence with borrowers.
The same market forces that rewarded volume business with huge profits in the subprime market are growing in the reverse market. Some of the nation’s largest banks are expanding their reach in the reverse mortgage market. Mortgage brokers, who once reaped profits from subprime and exotic loans, are now turning to reverse mortgages. And, securitization, which allowed subprime loan originators to disassociate themselves from the downside risks of abusive lending, is becoming more commonplace in the reverse mortgage industry.
The subprime mortgage crisis was driven by profiteering among all players in the industry and without regard to its impact on the lives of millions of Americans saddled with inappropriate mortgages. It is important to act now to save our seniors from the same scourge. We cannot wait until millions of elderly homeowners have been victimized to address the problems we know already exists.
The reason we had the subprime crisis is because we did not act proactively to stop it from getting out of control. The reverse mortgage crisis is already threatening to spiral out of control, and even Bell of the National Reverse Mortgage Lenders Association acknowledged in his testimony that the Bush administration froze any efforts on federal regulation of the industry in his last year in office. In any society, there will be winners and losers, so we have to be able to try to create the winners and losers. The winners, in this instance, should be the lenders who want to be able to follow the highest ethical standards without the fear of being undercut by someone who is willing to do anything to make a sale.
The Inspector General of the HUD found other troubling instances of the exploitation of our elderly:
Let me describe some of the loan schemes we have discovered through our investigations and audits:
•Unauthorized Recipient – Unauthorized individuals, including family members, friends or even neighbors, may keep HECM payments after the authorized recipient dies or permanently leaves the residence. In a recent HUD OIG audit, it was found that FHA did not ensure that lenders reported borrowers’ deaths in accordance with federal requirements. For the 31 loans reviewed, the contractor failed to provide documentation to support that FHA lenders notified HUD of borrowers’ deaths in writing. Further, the lenders failed to notify the contractor of borrowers’ deaths for 11 of the 31 loans and, for 13 loans, did not report in a timely manner the dates of borrowers’ death.
•Annuities and Financial Cross-Selling - Another activity that we currently have under investigation involves financial professionals convincing HECM borrowers to invest HECM proceeds in a financial product, such as an annuity, in an improper way. The financial professionals receive increased fees and, in the case of annuities, the victims are unable to get access to their savings for many years or even past their projected life expectancy. We are pleased that HUD, reacting to such cases, has enacted rules to prevent cross-selling. We, however, remain concerned that HECM borrowers may still be vulnerable to various cross-selling techniques and stratagems.
•Consumer Fraud – In a similar vein, just in the last couple of weeks, an OIG investigation led to an indictment in Maryland as a result of our participation in a local Elders Task Force. An elderly woman complained that her former health insurance representative stole approximately $200,000 from her HECM by convincing her that she needed to pay him a fee to process her loan application and to repay him the reverse mortgage loan amount. He told the victim she had to repay the loan by writing personal checks to him and she paid from funds received as well as from her retirement annuity and from cash advances on her credit card. We are currently in the process of identifying more reverse mortgage victims.
•Recruitment of Straw Buyers and Property Flipping - In several parts of the country, most notably in the upper Midwest and the Southeast, we have observed various solicitation efforts directed at recruiting "straw buyers" age 62 or over to act as "nominees" or "fronts" for certain HECM schemes. Typically, potential straw buyers are lured by the promise to "live rent-free for the rest of your life," or "seniors get a free house through a government program." In some cases, the straw buyers are not fully aware of the nature of the scheme. Straw buyers are "recruited" in residential areas with a high rate of renters. Often, the straw buyers are public housing residents or even homeless individuals. Since there are no specific credit or income requirements for HECMs, it is relatively easy to recruit eligible individuals.
Typically, the scheme works in the following manner:
Organizers obtain abandoned, foreclosed, or dilapidated properties for little money. They may apply some cosmetic improvements to the house. An inflated valuation or appraisal is obtained. This creates the basis for a larger HECM loan. The house is then quit-claimed to one of the straw buyers who have been recruited for the scheme. The quit claim deed is accompanied by some mechanism from which the scheme organizer is able to draw out the HECM proceeds.
In some cases, the mechanism is a promissory note executed by the straw buyer. In other schemes, it is a lien incorporated in the quit claim deed. And, in other situations, the mechanism is some form of mortgage created to justify a payout. The organizer may create a fake mortgage company, which "lends" funds to the borrower (no money changes hands, no loan is given, but a mortgage is filed). The subject refinances the borrower into a HECM. At closing the title company pays all outstanding debt including the fraud organizer’s fake mortgage and the organizer walks away with the payoff. In essence, the property has been "flipped."
Once the straw buyer occupies the home, an application is made for a HECM. When the HECM is endorsed, the straw buyer requests a lump sum payout, which goes in whole, or in part, to the scheme organizers. The straw buyer is typically left in possession of the property. Some straw buyers are unaware that the cash due to them at closing has been diverted. The straw buyers are also often unaware that they must pay property taxes and other fees and costs associated with residing in, and maintaining, the property. In many cases, they do not have the resources to maintain the property, or pay necessary expenses, leading to abandoned properties, properties taken over by others, and eventual defaults when discovered.
Current cases involve hundreds of properties in which the above-described conspiracy has been employed. These schemes clearly subvert the intention of the HECM program and create liability for FHA, which must assume responsibility for these over-valued properties.