Housing Study: Reverse Mortgage Fraud a Growing Problem

Housing and economic scholars believe the aging boomer population and fewer opportunities for fraud on the forward mortgage side have created an “ideal” situation for reverse mortgage fraud to thrive.

Reverse mortgage counselors are on the first line of defense to detect HECM fraud, say Andrew Carswell and Michal Polanowski, both of the Department of Housing & Consumer Economics at the University of Georgia, and Martin Seay, School of Family Studies and Human Services at Kansas State University, in an article published in the Journal of Housing for the Elderly last April.

“With the senescent population and the popularity of aging in place, many seniors are attracted to reverse mortgages to plan for retirement and to maintain their existing housing situation,” the authors write in Reverse Mortgage Fraud Against Seniors: Recognition and Education of a Burgeoning Problem. “Although theoretically reverse mortgages represent a viable investment product for those considering retirement, several pitfalls are possible for seniors, who can be unsuspecting victims of fraud.”

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The article outlines the most common kinds of fraud, including in HECM refinance and HECM for Purchase situations, along with how and when that fraud can be detected.

“The soft housing market at the end of the 2000s, while decreasing demand for HECMs as a while, has created an ideal situation for HECM fraud to thrive,” say the report’s authors.

Reverse mortgage fraud has two essential components, the researchers say: “deeply” discounted property and inflated property appraisals. Other factors contributing to fraud within the industry include the senior population being an “easy” target for financial crimes, and the aging of the baby boomer generation, which increases the number of potential victims.

“Given the substantial number of reverse mortgages originated over the past decade, it is not surprising that reverse mortgages have drawn attention from fraudsters, especially considering the reduced opportunities for traditional forms of mortgage fraud due to increased regulatory awareness,” says the article.

Fraudulent activity in the reverse mortgage space may be more prevalent than what is currently known, as it typically can’t be detected at early stages via mortgage payment default. And while reverse mortgage counselors are already tasked with the difficult proposition of educating consumers on a complicated financial product, they could benefit from increased training.

“[H]ousing counselors need training on how to recognize potential HECM fraud situations,” the writers conclude. “…The burgeoning demographic of those reaching and surpassing age 62 years necessitates further vigilance on this issue.”

Access the article.

Editors note: A previous version of this article indicated this was a recent study. In fact, it was originally published in April 2013. We regret the mistake.

Written by Alyssa Gerace

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  • I feel this article is good in the sense it is bringing to the surface that fraud is a growing concern. In fact, the article may not be strong enough on how severe fraud has become compared to prior year 2007.

    There are other things that have contributed to fraud that the article did not cover. Take a look at where the industry was 10 years ago. Look at the controls we had in place.

    HUD controlled the pricing of the product, they controled fees that were able to be charged, in fact they had a very tight reign on the reverse mortgage. So tight that the scammers did not want much to do with the reverse mortgage industry.

    What set one company and loan officer apart from another was the trust factor, knowledge of the loan officer and quality of service. It was NOT a free for all competitive market place!

    When FNMA came to the market with “Live Pricing”, this set the stage for a new playing field for all. Now the reverse mortgage product was competitive, the higher the rate, the more that could be made on the back end. We were taking on charachteristics of the forward mortgage world.

    Coupled with the fixed rate product coming to the market place, money was being made hand over fist.
    What else did this bring to our market? A new breed of loan officer and broker that saw the dollar bills that could now be made dealing with the reverse product!

    As time went on, more were attracted to the reverse market, more individuals with out the passion for the senior like a good share of you and I have.

    Lets not forget the enormous amount of regulations we have seen implemented on our industry since the passage of the “Financial Regulatory Bill” (Dodd-Frank) and the establishment of the “Consumer Financial Protection Bureau (CFPB).

    Now comes the philosophy of protecting the senior from the so many predators preying on them caused by the changes that were allowed to take place by our government in the first place!

    Regulation after regulation has been droped on us like the raid on Germany in world war II. Confusion, confusion and more opportunities for fraud!!!

    I could go on and on but I think you all have gotten the picture from my point of view. 2014 will be a year of many surprises.

    Only to be back 10 years ago when the reverse mortgage was truly a blessing for our seniors and HUD actually had there best interest as a priority. Why don’t they look back in time, why has our industry become so complex??

    Have a good day,

    John A. Smaldone

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