Though Often Helpful, Reverse Mortgages Sometimes Abused

NOVEMBER 23, 1998 VOLUME 6, NUMBER 21

“Reverse mortgages” can be a wonderful tool for keeping a frail elder at home, or for making a home stay more comfortable. Like so many good things, they can also be abused.

Typically, a reverse mortgage is a mechanism to permit a cash-short senior to liquidate a portion of his or her home equity to provide for care or other needs. To some elders, they are more attractive than traditional home-equity loans. The more traditional loans may be difficult to obtain without any income other than Social Security and a pension.

Reverse mortgages work very much as the name implies. Rather than taking out a loan and beginning to make monthly payments of principal and interest, the reverse mortgage borrower receives a monthly check from the lender. That check, and the income accrued on earlier checks, is added to the balance, but usually no payments are due during the life of the borrower.

Obviously, such an arrangement permits the gradual, planned withdrawal of home equity to pay for current costs of living. Most often, the reverse mortgage is used as a way of providing the small additional income required to keep an elder at home, and to delay any need for placement in a nursing facility or adult care home.

Although the reverse mortgage permits years of built-up home equity to be used to finance current care needs, the drawback of the arrangement should be obvious. At some point, determined by the amount of the monthly withdrawal, the value of the home and the interest rate, there will be no more equity available. In some reverse mortgage arrangements, the home must then be sold and the lender paid back; in others no sale is required until the death of the owner, but the home will no longer be available for distribution to the homeowner’s children.

It has been two decades since reverse mortgages first saw widespread use in this country. During that time a number of government agencies and community support groups have pioneered the concept, and have provided financial counseling to many applicants for reverse mortgages. More recently, a number of private lenders have seen a growing opportunity for a new type of business.

Last month a Kentucky company settled claims that its reverse mortgage program amounted to financial exploitation of the elderly. Commonwealth Life Insurance Company, a subsidiary of Providian Corporation of Louisville, Kentucky, agreed to a $5 million settlement in the lawsuit, which had been filed in San Mateo County, California.

Although Commonwealth had sold more than 1500 reverse mortgages to California residents beginning in the late 1980s, it had left the business about the same time that the suit was filed three years ago. Under the settlement, each Californian who took out a reverse mortgage with Commonwealth might be entitled to a $2,500 refund.

The Commonwealth case began as a San Mateo Public Guardian investigation. The public agency found that Beatrice Mathews, then in her 70s, had been talked in to obtaining a reverse mortgage and had quickly incurred over $35,000 in advances, fees and commissions. The Public Guardian was appointed to manage her estate, and brought the lawsuit.

San Mateo County promises it will pursue other reverse mortgage companies. A lawsuit has already been filed against Transamerica Corporation, alleging that its reverse mortgages amount to elder abuse.

In the Tucson area, reverse mortgages have been offered (in conjunction with extensive financial counseling sessions) by local social service agencies for several years. The reverse mortgage program now operates independently through Administration of Resources and Choices at (520) 327-8250.

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