It has never been easier to run a scam.
Thanks to easy and cheap technology, today's con artists can access marks from anywhere around the world. They fill up phone lines, inboxes and text messages. Even the few remaining fax machines occasionally see demands from a disinherited prince or the Internal Revenue Service.
Law enforcement agencies struggle to keep up (the real ones, not the ones demanding your credit card number). Much of the reason has to do with jurisdictional problems. Simply put, when a criminal can reach into someone's wallet from Novosibirsk or Sao Paulo, there's little your local police department can do. There's little even the FBI can do.
And there's even less that the Russian or Brazilian authorities want to do.
So, many Americans have begun to tune out the world. We send 76% of calls to voicemail when we don't recognize the caller (and half the time when we do). A full third of workers have simply stopped reading emails altogether, going from "inbox zero" to "who cares" thanks to an avalanche of messages that include spam and phishing attacks. And who can blame them? Anyone with a public-facing email address knows how much time it takes to cull out the trash. This writer alone has an entire set of Gmail filters dedicated to .ru addresses alone.
Social media algorithms create bad information feedback loops and the phone scammers have begun generating new numbers faster than ever so they can start a new generation of text-message based spam. It has gotten bad out there, and these days "out there" means your living room.
Into that mess steps the reverse mortgage scam, a con dedicated to fleecing the elderly.
What Is a Reverse Mortgage?
A reverse mortgage is a form of supplemental retirement planning. It lets homeowners age 62 or older take out a loan, a mortgage, on their home with no monthly payments. They can get the money in a lump sum or by installments over time depending on what works best. In exchange, the lender receives a claim on the property. When the homeowner sells the home or dies the loan becomes due.
As we wrote on the subject, this is designed to give Americans access to their home's equity without having to sell… For a homeowner to turn their investment into spending money means moving out and probably spending any money that they raised just finding another place to live. A reverse mortgage is intended to help retirees solve that problem. It gives them access to the value of their property without having to actually move out of the house altogether.
Under the right circumstances this can help people solve financial problems. As retirement has grown increasingly unaffordable for average Americans, reverse mortgages have exploded in popularity, growing by roughly 1,300% since 1999.
This has created a ripe opportunity for scams.
What Is a Reverse Mortgage Scam?
A reverse mortgage scam takes advantage of the complexity of reverse mortgages to steal a borrower's money, equity in their property, or both. Sometimes a senior citizen will be offered access to a property for free. Regardless of the specific format, the end goal is always the same: to steal equity from a property while passing the debt on to the victim.
Reverse mortgage scams target a particularly vulnerable population. Retirement has grown ever more tenuous for most Americans, leaving the elderly increasingly in need of the money that these con artists offer. This population often has diminished capacity as well, becoming more vulnerable to scams as they age and creating a perfect storm for con artists.
The scammer takes advantage of this and the inherently confusing nature of property finance. They convince an elderly victim to sign up for a complex product which often results in transferring the value of a property to the scammer and the debt to the victim.
Forms of Reverse Mortgage Scams to Watch Out For
Reverse mortgage scams take a variety of forms. A few of the most common include the following.
• The Free Income Scam
In this scam, the reverse mortgage lender advertises their product not as a loan but as "free income," "retirement supplement" or a way to "replace Social Security." The wording can change but the substance is always the same. They promise you essentially free retirement assistance without telling you that this is a loan or the details of what that loan entails.
Often scammers will make this program seem legitimate by claiming that it is a government program. Again, keeping their language light on the details, they'll claim that they are offering you federal money to help with your retirement. They may often imply that it has to do with Social Security to further legitimize the scam. Technically, a reverse mortgage is offered with government backing, but that doesn't make it free money. Victims who enroll in these programs often don't know that they have taken out a loan, nor do they understand that they've just signed over their home to an unscrupulous lender.
• The Social Security Scam
This is a version of the free income scam. Under this approach, a lender will offer to help you maximize your Social Security income by delaying payments. Technically, they aren't lying here. Borrowers are eligible to take out a reverse mortgage at age 62 and, by delaying Social Security payments until age 70, can increase their benefits.
Once again, however, the scammer often will not make it clear that this is a loan. Instead, they will typically try to present it as some sort of "government program" or "federal retirement assistance." Their goal is to hide the fact that the check you receive every month is coming out of your own property by making it seem as though the money has come from the government. Making matters worse, typically the interest you pay on the reverse mortgage is significantly more than the additional income you'll gain by delaying Social Security payments.
If a reverse mortgage is, in fact, part of your retirement plan then using it to delay Social Security may actually be a sound decision. Just make sure you understand what the lender might be trying to hide: This is a loan and it comes with interest.
• Home Improvement Scams
Under this scam the lender tries to convince the victim to make repairs or improvements to their home. They sell this through a variety of tactics. Some appeal to the idea of enjoying your retirement, selling the promise of golden years spent with a brand new kitchen. Others suggest that you should upgrade your home before leaving it to the children. They sell the idea of a family legacy for years to come.
Still others approach this through fear, telling the elderly that their home violates certain building codes and may be seized or condemned by the government. For elderly people, especially those already worried about finances, this can be a terrifying threat.
However they get there, the scammer wants their victim to hire them as a contractor on the house. When the subject of payment comes around the scammer suggests getting a reverse mortgage. Sure it's expensive, they might say, but it's not as bad as having the city seize your home.
• Property Flipping Scams (Theft)
This is also known as the free home scam.
The scammer will purchase a low-cost property, typically one that has been abandoned, distressed or auctioned off. They will then convince their victim to take possession of the property, transferring the title for either nothing or (more often) an insignificant amount. Most scammers prefer the latter option because transferring a deed for nothing creates an unenforceable contract and they want this deal to stick.
The scammer then convinces the victim to take out a reverse mortgage on their new property for as much as possible. Often they will use fraudulent appraisals to maximize their gains. They then steal this money from the victim by fraud or other means.
Essentially this is a way for con artists to extract value while sticking someone else with a worthless property.
• Property Flipping Scams (Fraud)
Another version of the property flipping scam. In this case, the scammer will convince the senior citizen to buy the property using the proceeds of a reverse mortgage that they take out on that same property. This is a loan called a "Home Equity Conversion Mortgage For Purchase." It is designed to let seniors buy a place to live using the equity of that property as payment.
The scammer inflates the value of the property as much as they can, typically by making the home look far nicer than it actually is. Because a reverse mortgage for purchase involves substantial money down (typically between 40% and 60%), the victim gets bitten three times. First they lose their savings on the down payment, then they take out a significant mortgage on what winds up a worthless piece of property.
Then they have to live in that house.
• Investment Scams
This is a scam that is more related to reverse mortgages than actually dependent on them.
In the investment scam someone will approach a senior citizen with a potential investment. Often this person will be a financial adviser, but not always. It's unfortunately common for this person to be someone who has befriended the victim through a local church or a family member or friend of the victim.
As with many other forms of reverse mortgage scam, this one also plays upon the financial insecurity of the victim. The scammer will promise some financial product that can help make someone's retirement more secure or more comfortable, such as an annuity or an income-generating mutual fund. To help the victim pay for this product the scammer will recommend a reverse mortgage.
In many cases, the scammer will then simply steal this money by promising to make the investment on the victim's behalf. Other times, particularly with financial professionals, the financial product will pay the scammer a significant commission for generating new investors.
• Single-Spouse Mortgages
Finally, many lenders try to convince borrowers to take out a reverse mortgage using only one spouse as the borrower.
Lenders try to do this because under most circumstances a reverse mortgage becomes due once the named borrower dies. If they believe that one spouse is likely to die substantially before the other, then this process can accelerate the loan.
This, however, may leave a surviving spouse facing collection on their home. To avoid this, make sure that no loan is ever taken out on the property without listing both names on the mortgage.
It's never too late - or too early - to plan and invest for the retirement you deserve. Get more information and a free trial subscription to TheStreet's Retirement Daily to learn more about saving for and living in retirement. Got questions about money, retirement and/or investments? Email Robert.Powell@TheStreet.com.