Today’s uncertain economic environment has led an increasing number of seniors to access their home equity through reverse mortgage products as a way to ease their financial situation. As a result, senior homeowners are increasingly becoming a prime target for dishonest actors. According to the FBI, HECM-related fraud is occurring in every region of the United States and has the potential to substantially increase as demand for this product rises in demographically dense senior locations.
Last month, I wrote about financial abuse of the elderly by family members holding a power of attorney and suggested certain measures reverse mortgage professionals could take to help combat this problem. This article reviews other common types of reverse mortgage fraud and tips for best practices that will help safeguard your company.
At its core, reverse mortgage fraud is an illegal act that occurs when perpetrators falsify, omit or fabricate information in order to obtain a loan that strips legitimate or inflated equity from the collateral. In many of the reported scams, the elderly victims are identified through local religious groups and investment seminars. The seniors are often offered free homes, investment opportunities, or foreclosure or refinance assistance, but in reality, they are being used for property flipping and other criminal schemes. Reverse mortgage professionals should be aware of these illegal schemes so they can better identify potential fraudulent transactions.
Property Flipping Schemes
Equity theft schemes are the most common method used by mortgage fraud perpetrators to exploit HECMs. In this type of fraud, perpetrators identify and acquire foreclosed, distressed or abandoned properties. The scammers recruit “straw buyers” to
purchase these properties who commit occupancy fraud by fraudulently stating they will occupy the property as their primary residence. Next, the schemers recruit senior citizens to “purchase” the property from the straw buyer. But there is no exchange of money. Instead the property is simply transferred from the straw buyer to the senior citizen by quit-claim deed for no consideration. After the senior is on title, the fraudsters instruct the senior to obtain a HECM with the aid of a fraudulently inflated appraisal. The appraisals are typically inflated by arranging for cosmetic repairs to the property or documenting repairs that were never actually performed. Investigators have noted appraisals as high as 1,000 percent of the actual fair market value of the home. The loan proceeds are then pocketed by the criminals after closing.
To combat this type of scheme, reverse mortgage professionals should be extra vigilant when any of the following red flags appear:
-The borrower has a recent deed to the property with no or nominal consideration. Consider requiring a six- or 12-month seasoning requirement for property ownership to reduce fraud. In addition, be extra cautious if the borrower explains that he or she received the property “free” from a special government program. Fraudsters often convince the unsuspecting senior that new government programs provide free homes to qualifying seniors. Conduct an additional investigation to reduce the likelihood of fraud.
-The borrower has a recent deed to the property that shows consideration, but there is no recorded purchase money mortgage. If the acquisition deed into the current vested owner is not accompanied by a concurrent purchase money deed of trust or mortgage instrument, exercise caution. It is rare that any individual will be in a position to purchase real estate without financing. Require a plausible written explanation as to the terms and circumstances of the transaction and request follow-up documentation as appropriate.
-Pay close attention to the methodology used in the appraisal. Be vigilant for comparable sales that are outdated or in dissimilar neighborhoods. Look for the use of a cost approach for a property that is not new construction. Lenders can and should independently verify the value of the comparable sales used in the appraisal by using third-party or online resources, such as the Multiple Listing Service. However, note that today’s thieves are sophisticated enough to infiltrate these types of databases and manipulate the sales information. It is therefore essential to continually train your underwriters and appraisal reviewers on these types of red flags and other pertinent issues to help prevent losses resulting from inflated and fraudulent appraisals.
Distressed Non-Senior Mortgagors
Distressed mortgagors who are under the age of 62 will sometimes ask senior parents, other family members or friends to take out a HECM loan for them. One condition for a borrower to obtain a HECM is that they live in the subject property as their primary residence. The distressed mortgagor might add the senior citizen to title in order to meet this requirement. In some cases, distressed mortgagors will even assume the identity of the senior citizen and obtain the HECM without the senior’s knowledge by submitting fraudulent paperwork to apply for and obtain the loan.
Be vigilant and request backup documentation and explanations for any of the following red flags:
–Utility bills that are not in the applicant’s name. Look for any utility bills and other monthly statements that are not in the borrower’s name or that have amounts too little for a person occupying the home full time as their primary residence. If there is any doubt about occupancy, consider sending an agent to conduct a visit to the property to verify whether the senior citizen is in fact living in the property. You should also examine the appraisal photos to make sure the home looks like it is lived in full time.
–The property has existing liens taken out by someone other than the senior. If the HECM proceeds are being used to pay off an existing mortgage in the name of someone other than the senior, be sure to verify occupancy. Consider requiring a written explanation from the borrower detailing why they are using loan proceeds to satisfy another’s debt. Although there is nothing per se wrong with paying another person’s obligation, this red flag coupled with other factors, such as a recent quit-claim deed adding the senior to title, may warrant additional investigation.
–The mailing address is different from the property address. Request an explanation and conduct proper diligence if you notice that monthly statements or other paperwork related to the HECM loan do not correspond with the senior’s property address. For example, if there are discrepancies between the credit report and loan application, consider utilizing a third party to perform additional research on the property and applicant. You can also call the applicant directly and ask pertinent follow-up questions for reassurance that the transaction is not fraudulent.
–Rushed Transactions. Be cautious if a customer requires you to move quickly to close his or her loan without providing you sufficient time to ask appropriate questions and request backup documentation. A rushed transaction may be acceptable if there are no other red flags present. However, always be wary of these situations. Crooks may not want to provide you with an opportunity to analyze the transaction. Use your best judgment to determine whether the transaction requires you to take another look at the file or obtain additional documentation.
In today’s financial environment, perpetrators are continuously becoming more creative in their schemes. Reverse mortgage professionals should know how to spot and identify these potentially troublesome transactions. By being aware and following these best practices, you can help safeguard the program for the senior citizens who rely on HECMs to provide for them in their old age.
