This presentation outlines some of the broad issues that encompass the dilemmas that seniors face in taking on reverse mortgages, a housing option that allows older Americans to age in place. In addition, the presentation covers some recent research results regarding housing counselors' roles in educating and preparing their clients on reverse mortgages, specifically the role that fraud from outside parties can play.

1. Reverse Mortgages and
HECMs: The Overview and
Warning Signs for Older
Americans and Housing
Professionals
Andrew Carswell, University of Georgia

2. 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)

3. 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 Mac
 Fannie Mae
 NAHB

4. My
Background
BUT MOST
IMPORTANTLY!

5. My
Background
I AM BUDDIES WITH ANNE GLASS!!!!

6. 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)

7. 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)

8. 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.

9. 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

10. 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.

11. HECM
Overview
There are usually three ways in
which the proceeds are received in
a true “reverse” mortgage:
 Lump sum
 Monthly payment
 In a credit line, where you
withdraw from it as needed
 Or a combination of the three

12. 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.

13. 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)

14. 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.

15. 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.

16. 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.

17. Important to
Remember
HECMs are FHA insured products.
 If loan balances exceed home values, lenders’
losses are covered.
Possibility exists for potential moral hazards.

18. 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.

19. 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

20. 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.

21. 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

22. 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.

23. HECM Fraud
Overview

24. HECM Fraud
Overview

25. 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

26. 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.

27. Housing
Counselors
and HECM
Fraud
Despite these challenges, housing counselors
have a unique opportunity to identify and thwart
fraudulent activities.

28. 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.

29. 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.”

30. Tips For
Identification
 In many cases of fraudulent activity, several
seniors have reported receiving gifts from the
same individual.

31. 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.

32. 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.

33. 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.

34. 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.

35. 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.

36. 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.

37. 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.

38. 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.

39. 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.

40. Closing
Remarks
 Where does that leave us?
 What is the next actionable step?
 How do we create more awareness?

41. Questions?
Comments?