Reverse Mortgages and HECMs: The Overview and Warning Signs for Older Americans and Housing Professionals

Andrew Carswell, University of Georgia

The Problem

Traditionally, Americans have put an emphasis on homeownership, often to the extent that a significant portion of wealth is tied up in home equity (Censky, 2011; Davidoff & Welke, 2004; Wolff, 2004)

This reliance on home equity is even more pronounced for the elderly population, who often do not have the ability to generate the cash flow necessary to provide for their costs of living. (Apgar & Di, 2005; Shan, 2009)

My Background

I have been at UGA’s Department of Housing & Consumer Economics for 10+ years now

Before that, I received my Ph.D. in urban planning at the University of Delaware

My dissertation was written on the outcomes measured by those who had undergone homeownership counseling in the city of Philadelphia

Before that, I worked at three housing companies/organizations:

Freddie MacFannie MaeNAHB

My Background

BUT MOST IMPORTANTLY!

My Background

I AM BUDDIES WITH ANNE GLASS!!!!

The Problem

These individuals, considered house-rich and cash-poor, are often forced to sell their home to maintain their standard of living.

However, after incurring new costs of living over time, financial situations are not greatly improved.

Furthermore, 90% of individuals age 65 and older prefer to remain living in their homes. (Bayer, Harper, & Greenland, 2000)

The Scope

2007 Survey of Consumer Finances estimates that 4.8 million elderly households have at least 95% home equity in homes that represent at least 75% of their net worth.

Moreover, the most recent economic downturn significantly decreased the retirement readiness of many U.S. households (VanDerhei, 2011)

HECM Background

In reaction to this growing financial profile, the Home Equity Conversion Mortgage (HECM) program was created to provide a viable alternative.

HECMs, a form of reverse mortgage, allow homeowners to remain living in their homes by providing access to their homes’ equity, with repayment deferred until they move out or their home is sold.

HECM Overview

A traditional HECM refinance loan provides access to home equity to an existing homeowner that meets three basic requirements:

Age 62 or older Fully paid off home or be able to repay

outstanding debt with loan proceeds Must claim the home as the primary

residence

HECM Overview

A portion of an owner’s equity is made available to the homeowner based on three factors:

Home value Owner’s age Prevailing interest rates.

The remainder of the equity is preserved as a buffer to cover interest and finance charges.

Historically, HECM’s have been plagued with high costs, limiting their effectiveness as a financial planning tool.

HECM Overview

There are usually three ways in which the proceeds are received in a true “reverse” mortgage:

Lump sumMonthly paymentIn a credit line, where you

withdraw from it as neededOr a combination of the

three

HECM/Reverse Mortgage Example

Important to remember that in a classic reverse mortgage example, your debt increases as your equity decreases.

Just as important to remember is that in a classic “forward” mortgage arrangement, your debt declines over time while your equity increases.

HECM/Reverse Mortgage Example

Your home is presently worth $300,000, free and clear

You foresee yourself living for another 20 years

You believe that you will need $500 extra per month in living expenses

A reverse mortgage could meet those needs, which comes out to a total debt at the time of death of $120,000, plus interest ($500 X 12 X 20)

Remaining equity in the home would be $180,000 IF there was no house price appreciation

The likelihood is strong, however, that the house price will be much higher by that point in time

The remaining heirs can sell the home upon the beneficiary’s death to satisfy the payment of the debt (and likely still split some proceeds of the sale)

Two additional HECM types

HECM for Purchase, also referred to as a purchase money HECM, allows for the creation of a HECM to purchase a new home

HECM Saver provides a lower cost alternative, but with diminished loan amounts.

Fraud Background

There is a growing body of literature on mortgage fraud centered around fraud perpetrated during the primary mortgage loan origination phase (Baumer, Arnio, & Wolff, 2013; Carswell, 2009; Carswell & Bachtel, 2007, 2009; Carswell, Wade, Smith, & Huet, 2010; Koller, 2010; Mikelbank, 2011; Nguyen, 2010; van Gestel, 2012).

This fraud flourished during the boom years of the real estate market as soaring home values provided ample opportunities.

Fraud Background

As economic conditions changed, fraudsters moved into the HECM market.

Two factors aided this shift: A vastly increased volume of HECMs. The recognition of seniors as an easily

targeted population for victimization of financial crimes.

Important to Remember

HECMs are FHA insured products.

If loan balances exceed home values, lenders’ losses are covered.

Possibility exists for potential moral hazards.

Moral Hazard Concerns

During the last two years, The Atlanta Homeownership Office of HUD confirmed there was false information in 28% of the reviewed cases where FHA insurance was applicable.

In communication with these lenders, significant evidence was presented that lenders intentionally circumvented HUD’s requirements in approving loans and failed to follow up on inconsistencies in loan applications.

Moral Hazard Concerns

As of April 2012, an additional 2,330 claims were pending review by The Atlanta Homeownership Office, with a potential HUD payout of $202,710,000 based on the current average loan payout

HECM Fraud Overview

HECM fraud schemes vary widely, but like primary mortgage fraud, they center around the artificial inflation of home values.

These inflated values allow fraudsters to capitalize on loan proceeds that far exceed actual home values.

HECM Fraud Overview

Two most common mechanisms for HECM fraud are

Setting up shell companies that hold non-existent primary mortgages, with HECM proceeds directed to pay this “loan”

Posing as a seller in fictitious transactions that “sell” homes for artificially high purchase prices

HECM Fraud Overview

While the elderly individual is often left with the home, it is often substandard and inadequate for their needs.

Meanwhile, HECM loans are generated on properties that do not support the loan values.

Due to the deferral of repayment, fraudulent transactions are often not discovered for years.

HECM Fraud Overview

HECM Fraud Overview

The Housing Counseling Industry

Begun in late ‘60s/early ‘70s as a way of helping borrowers navigate through the complicated process of obtaining/keeping a home.

Generally takes on various forms:

Pre-purchase

Post-purchase

Tenant counseling/tenants’ rights

Delinquency counseling

HECM/reverse mortgage counseling

Regarded by the clients as a “trusted gatekeeper”

Varying degrees of emphasis put on counseling by the housing industry

Housing Counselors and HECM Fraud

As a part of the application process, HECM borrowers are required to receive consumer counseling from a HUD-approved counselor

Overall, HECMs present a unique challenge to housing counselors.

A combination of increased complexity, counselor qualification standards, and follow-through requirements serve to increase the difficulty of providing quality housing advice.

Housing Counselors and HECM Fraud

Despite these challenges, housing counselors have a unique opportunity to identify and thwart fraudulent activities.

Tips For Identification

As with traditional mortgage fraud, the profit for perpetrators of refinance HECM fraud is based on fraudulent appraisals.

A strong signal of possible fraudulent activity is a short turnaround time between the documented home purchase and the application for a HECM.

Tips For Identification

The simplest way to detect HECM for purchase fraud is to investigate the source of the down payment used in the purchase of the home.

In most fraudulent cases, documentation for the down payment is provided in two forms:

a bogus HUD-1 indicating the sale of a previous home that the senior did not own; or

the creation of a fraudulent “gift letter.”

Tips For Identification

In many cases of fraudulent activity, several seniors have reported receiving gifts from the same individual.

Quick Overview of Two Surveys

Survey of HECM approved Counseling Agencies in the State of GA showed very limited understanding or awareness of HECM fraud or how it would be perpetrated.

Results of the larger national survey provided even more detail.

Overview of Two Surveys

In the spring of 2012 we conducted a sent a survey to each of the HECM approved Counseling Agencies in the State of GA.

Eight of the nine agencies responded.

Open ended responses showed very limited understanding or awareness of HECM fraud.

Furthermore, a complete lack of understanding of how it was perpetrated was revealed.

Overview of Two Surveys

Based on these responses a new survey was developed, and using the HUD HECM approved agency data base was distributed nationally.

Sought information in three categories Agency and counselor information Typical interactions with clients Awareness and training in both primary

mortgage and HECM fraud

It was sent to counselors at 190 agencies and complete responses were received by 70.

Agency and Counselor Overview

The average agency employed 4-5 housing counselors, with 1-2 of them providing HECM counseling.

The average counselor had almost 9 years of housing counseling experience overall, and 5 years providing HECM counseling.

The average counselor spent 40% of their time on HECM counseling.

HECM Training and Certification

80% indicated that the HECM certification and training was more difficult than other counseling certification procedures.

However, written responses indicated that most counselors felt that it was necessary and worthwhile.

HECM Counseling in Practice

Overall, counselors reported conducting 55% of HECM counseling in person and 45% over the phone.

However, many reported doing 100% through one of those methods.

Average counseling session lasted between 1 and 2 hours, with a similar amount of time spent preparing and following up with clients.

HECM Fraud Awareness

47% of counselors reported a limited awareness of HECM fraud, as compared to 29% for primary mortgage fraud.

Furthermore, the same 47% indicated that they had limited awareness of fraud when performing counseling.

Is Fraud a Problem?

The majority of counselors reported that HECM fraud was at least a moderate problem nationally.

In contrast, 79% felt that Fraud was either not a problem or a minor problem for their clients.

Fraud Training

54% of respondents indicated some level of HECM fraud training.

Note: The written responses indicate that much of this training for HECM fraud is not related to/ does not cover the fraud presented today.

57% indicated some level of training related to primary mortgage fraud.

65% indicated that they had no process for identifying or reporting fraud in their agencies, with an additional 10% indicating that they were unsure.

Closing Remarks

Where does that leave us?

What is the next actionable step?

How do we create more awareness?

Questions?Comments?