Let’s be honest. Most products/services have the potential to benefit their users, and reverse mortgages are no exception. For those that desperately wish to remain in their homes but lack other means to do so, reverse mortgages represent a realistic option. At the same time, with every product/service there also exists the potential for scamming and misuse, and again reverse mortgages are no exception.

There is something about the nature of reverse mortgages which makes them particularly prone to fraud. Perhaps it is because borrowers are older than average, and in many cases, elderly and even senile. Such borrowers may lack trusted advisers and may be desperate for cash, which can easily be exploited by scammers. Reverse mortgages also tend to be somewhat more complicated than conventional mortgages, which can also easily be exploited. Finally, the fact that reverse mortgage borrowers never need to write a check to the lender (funds move in one direction) probably leads a sense of complacency.

Moreover, recent government legislation has actually facilitated an increase in fraud, rather than mitigating it. In the late 1990’s, the Clinton administration changed the rules governing the hiring of appraisers, such that they are no longer subject to Federal Housing Administration (FHA) Oversight. Now, they are appointed directly by the lenders. Second, “Congress earlier this year temporarily raised the maximum amount homeowners can borrow against, from $417,000 to $625,500, making the loans ‘more lucrative for misdeeds.’ ”

The first development has been instrumental in reverse mortgage fraud involving distressed real estate, whereby “speculators purchase distressed properties and, with the aid of cosmetic repairs and inflated appraisals, deed them to seniors at above-market prices. Seniors—some of whom may be part of the scheme—typically are promised homes for no money down. In return, they secure a reverse mortgage and divert some, if not all, of the proceeds to the scheme’s promoters.” [The WSJ article from which this description is pulled, details several such scams at length, and is a must read for anyone who harbors suspicions about the propriety of their reverse mortgage.]

As a result, legislation has been proposed which would undo what Clinton effected, making it so all appraisers must be hired directly by the FHA. For those of you with libertarian leanings that are skeptical of any government role in “free markets,” consider that the majority of reverse mortgages are insured by the FHA, which means that taxpayers are ultimately on the hook for any impropriety.

In addition, some lenders have taken measures into their own hands by working to prevent reverse mortgage speculation. Recent rule changes implemented by the biggest lenders require that borrowers must live in a home for at least six month to one year before they can become eligible for a reverse mortgage. This is pretty crazy, when you consider that reverse mortgages are designed to aid older borrowers that presumably have lived in the same home for many years. I guess it shows how opportunism remains widespread, even in spite of the bursting of the bubble.