Seniors who have built up equity in their homes, but who may not have enough income to live comfortably, are increasingly turning to reverse mortgages. Reverse mortgages insured by the U.S. Federal Government are called Home Equity Conversion Mortgages or HECMs.

Like everything else involving potentially large sums of money, HECMs and the seniors eligible for these reverse mortgages have become targets for scam artists. While most professionals working with reverse mortgages are scrupulously honest and ethical, all seniors (and their families) who are contemplating using a reverse mortgage to increase their cash flow need to be aware of the most popular scams in order to avoid being duped.

The FBI has issued an alert to the most common forms of HECM scams so that consumers may more readily spot possible problems. As always, having a personal attorney who represents only you and who can review any pending transaction is always a very good idea.

Home Equity Conversion Mortgages

A home equity conversion mortgage (HECM) is a reverse mortgage loan insured by the Federal Housing Authority (FHA). While other kinds of reverse mortgage loans exist, the HECM is the most well-known and widely available. It enables eligible homeowners to access the equity in their homes by providing funds (in many instances in a lump sum payment) without the homeowners having to make monthly payments on the loan during their lifetime in the home.

To be eligible for an HECM, a borrower must be 62 years or older, own their own property (or have a small mortgage balance), occupy their property as their primary residence, and participate in HECM counseling. There are no income, credit, or employment qualifications required of the borrower, and no repayment is required if the property is the borrower's primary residence. Closing costs may be financed into the mortgage loan. The homeowner is responsible for property taxes, insurance, maintenance, utilities, fuel, and other expenses.

The FBI and Department of Housing and Urban Development-Office of Inspector General (HUD-OIG) report that unscrupulous loan officers, mortgage companies, investors, loan counselors, appraisers, builders, developers, and real estate agents are exploiting these reverse mortgages to defraud older homeowners. They recruit seniors through local churches, investment seminars, and television, radio, billboard, and mailer advertisements, and commit their fraud primarily through equity theft, foreclosure rescue, and investment schemes.

Equity Theft

Equity theft schemes are the most common method used to exploit home equity conversion mortgages. Perpetrators use a scheme designed to withdraw false and inflated equity from residential properties.

Fraudsters purchase residential properties using "straw buyers." Straw buyers are individuals who falsely state that they will be using the property as their primary residence. The individuals who recruited the straw buyer then recruit seniors to "purchase" the property from the straw buyer by transferring the deed to the senior with no exchange of money.

After the senior has occupied the property for at least 60 days, the perpetrators arrange for the senior to obtain a reverse mortgage, and -- with the aid of a fraudulently inflated property appraisal -- encourage them to request a lump sum disbursement of the equity. The perpetrators, often with the help of the settlement attorney, then abscond with all of the equity money at closing.

Foreclosure Rescue

Fraudulent foreclosure rescue/reverse mortgage programs are often advertised as "turn around mortgages," "foreclosure reversals, "and "foreclosure rescue programs."

Foreclosure rescue schemes are used to commit mortgage fraud by attracting seniors who are in jeopardy of losing their homes to foreclosure. The promise is that the reverse mortgage program promoted by the sellers will prevent this from happening.

Once recruited, the senior is then informed that they do not qualify for the reverse mortgage program, but that they do qualify for another mortgage loan type.

The thieves then locate an investor willing to act as a straw, or fake, buyer. They order fraudulent home repairs, arrange for an inflated property appraisal (typically inflated by arranging for simple cosmetic repairs to the property or documenting repairs that were never performed), and then obtain a new mortgage that transfers the property away from the senior. They pocket the equity. The senior is then often notified by the new investor/owner to either repurchase the home at a higher price or find alternative living arrangements.

Investment Schemes

Investment schemes are similar to equity theft schemes and are used by to steal the reverse mortgage loan proceeds under the guise of investing it in an annuity, real estate, or other investment product.

Reverse mortgage fraud is a federal felony offense which could result in a prison sentence. Because ignorance is not a good legal defense, and too many of our seniors are trusting of authority figures such as "bank officials," it is particularly important to be vigilant about these kinds of schemes so that your senior is, a) not duped out of significant home equity, and b) not left to face serious legal consequences.