Helped along by television ads featuring actor James Garner and other celebrities, financial firms are enticing seniors to take equity out of their homes through reverse mortgages.
Federally insured reverse mortgages allow homeowners 62 and older to borrow against home equity and receive tax-free cash. The money borrowed plus interest is repaid only after the homeowner dies or moves out. The industry is expecting growth of these loans to accelerate since the lending limit has risen to $417,000.
But a reverse mortgage should be a last resort. When homeowners use it to splurge on travel or pay off credit cards, they lose an important safety net that might be needed for an emergency. Lenders, though, are promoting a wide range of uses for reverse-mortgage cash. Financial Freedom Senior Funding Corp. of Irvine, Calif., suggests using the money for "special things you've always wanted to do, such as travel or hobbies."
Financial Freedom is a subsidiary of IndyMac Bank, which was taken over by the Federal Deposit Insurance Corp. in 2008. A sale of IndyMac is pending.
The dangers are outlined in a lawsuit filed against Financial Freedom. The suit claims that the company advised its business partners to encourage seniors to take out as much money as possible in reverse mortgages so that the fees and interest paid to lenders would be maximized.
The complaint goes on to say that Financial Freedom encouraged and trained partners, some of whom were insurance agents, to sell insurance products to seniors with the money gained from the reverse mortgage. In turn, Financial Freedom would obtain additional interest on the extra money borrowed.
The plaintiff, Betty Adcock, 80, says she was persuaded to replace her home equity line of credit with a reverse mortgage. Her daughter, Carol Anthony, had already helped her establish a $150,000 no-fee home equity line for emergency expenses. During the first three years, Adcock had borrowed about $19,000. But her daughter said at a December 2007 Senate committee hearing that "in place of the no-fee home equity loan, she now had a reverse mortgage that charged 18 closing fees." The fees totaled a staggering $16,791.23, Anthony said. The salesman, according to the suit, advised Adcock to choose a reverse mortgage payment option that required her to take out $1,002.88 monthly, increasing the amount of interest she would have to pay. The suit claims that the reverse mortgage required that Adcock immediately make home repairs of about $5,500 and pay Financial Freedom for monitoring whether the repairs were done. On the date the loan closed, she owed $56,741.59.
With the help of her daughter, Adcock paid off the reverse mortgage six months later at a final cost of $71,942. Financial Freedom denies the allegations.
People considering tapping home equity can contact a HUD-approved counselor (800-569-4287 or www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm). A free session with a trained counselor can help evaluate all of the choices. If you opt for a reverse mortgage, don't sign any documents until they have been reviewed by a lawyer you trust.