LIANE HANSEN, host:
This is WEEKEND EDITION from NPR News. I'm Liane Hansen.
Much of the attention in economic news lately has been paid to the faltering housing market, subprime lending and foreclosures. But there is one money issue that could use a little more scrutiny.
Unidentified Man: The easiest sell you've ever made. Here's your opportunity to get in on the ground floor of a business that could make you an incredibly rich.
HANSEN: That's an actual pitch from a flyer sent out to potential salespeople in a hot new industry: reverse mortgages. The typical customer is a senior citizen who is house rich but cash poor, and there are many of them. They've lived in their home for decades and their mortgage is paid off.
But they may not have much in their bank account, and they're finding it more difficult to pay their bills. A reverse mortgage allows homeowners age 62 and up to transfer equity from their home into monthly income. For some it works very well. For others, well, welcome to the dark side.
For the last several weeks, we've researched how reverse mortgages have been marketed. We found that some sales people have been using unscrupulous tactics and high-pressure pitches to sign up senior citizens. So on this part of the program, we will examine the reverse mortgage industry.
You'll hear the stories of some seniors who ended up paying exorbitant fees or buying unnecessary insurance policies.
Ms. CAROL ANTHONY(ph) (Daughter of Reverse Mortgager): After the first month she saw the statement and she said, oh my gosh, this has got to be a mistake.
HANSEN: That's Carol Anthony. Her mother, Betty Adcock(ph), was 80 when she was talked into signing up for a reverse mortgage. She had lived in her home in Salinas, California for many years and was in a good financial position, with CDs, municipal bonds, even a home equity line of credit. She didn't need a reverse mortgage.
But after an elderly friend saw an ad on TV and signed up for one, she talked Betty Adcock into meeting with a salesman.
Ms. ANTHONY: The salesman did not have a license to deal in real estate. He did not have a license to deal in securities. He did have a valid California license to sell insurance products.
Ms. ANTHONY: For insurance only. The brochures that he sent my mother said that he was a financial planner, an elder advisor, a real estate specialist. He fairly well misrepresented himself.
HANSEN: So the salesman comes to the house and chats your mom up.
Ms. ANTHONY: Yes, and he gained my mother's confidence.
Ms. ANTHONY: Rather rapidly. She did not really realize that she was getting a mortgage. She didn't realize what had happened until a month later when she got her first statement and it showed the $19,000 payback fee and the $17,000 loan origination fees and the $1,000 that she was taking out a month. And she became physically ill.
HANSEN: And wasn't she sold another product as well?
Ms. ANTHONY: Yes. And she did not know that she'd also bought $125,000-annuity and that it would mature and benefit her when she was 100 years old. The salesman had taken $125,000 with her signature out of a municipal bond and swapped it over to the annuity.
HANSEN: Carol Anthony says her mother was mortified. She had always relied on her late husband to take care of the family finances and knew little about mortgages, interest rates, or even basic money management.
Ms. ANTHONY: She's afraid to tell me, 'cause this was her first outing into the financial world and she thought that she'd done just fine. And so she had just basically got digestive problems, was not able to eat well and ended up in the hospital around November of that year. And that's when I found out what had gone wrong.
Ms. ANTHONY: She was crying. She said, I can't believe what I've done. I'm so sorry. I'm so embarrassed. I feel like a fool. And she was fairly devastated.
HANSEN: Advocates for the elderly say they're hearing more and more tales like Betty Adcock's, and it worries them. Prescott Cole is the senior staff attorney for the Coalition to End Elder Financial Abuse, a national advocacy group for seniors. He says reverse mortgages can be a bad deal for many elderly people.
Mr. PRESCOTT COLE (Senior Staff Attorney, Coalition to End Elder Financial Abuse): They're incredibly expensive. If you have $100,000 you're pulling out, it could come out to be anywhere between $14,000 and $16,000 that you will immediately owe on the loan before you take out the first nickel. And on top of that there's interest, and the interest compounds.
We're really worried about unsuitable situations where seniors are pulling the money out thinking that there's no consequence. There's a very big consequence.
HANSEN: Older homeowners hold an estimated $4 trillion in equity. That's a big pot of available money. Advocates and regulators say this growth has opened the reverse mortgage industry to salespeople looking for a quick way to make a hefty commission. Some earn the seniors' trust by calling themselves registered financial gerontologists or certified senior advisors or even government representatives. And they're aggressive, enticing seniors through radio and TV ads, as well as glossy flyers.
Mr. COLE: Elders are getting invitations to come to seminars at just a phenomenal rate. My father, who's 86, I asked him, you know, do you get these invitations to come to seminars. And he told me that he could build a bonfire with the amount of mail that comes through asking him if he wants to learn more about this, that or the other thing.
HANSEN: Senior advocate Prescott Cole says reverse mortgages are not the only problem. There are a lot of other financial products, like deferred annuities, that salespeople pitch at the same time.
Mr. COLE: We have a case where this one individual, a 92-year-old, was told to pull out his equity and he put $650,000 into an annuity that doesn't mature until the year 2063. The person that sold this annuity to the elder for four hours worth of work, picked up something like $72,000 in a commission.
HANSEN: Reverse mortgage industry officials say they frown upon such marketing practices.
Mr. PETER BELL (President, National Reverse Mortgage Lenders Association): They are the exception, not the norm. And as in any business or any business that's perceived to be a growing opportunity, there are some parties that have entered the business who everybody would be better off if they were not involved.
HANSEN: Peter Bell is president of the National Reverse Mortgage Lenders Association. He agrees that reverse mortgages usually shouldn't be packaged with long-term annuities.
Mr. BELL: Our attitude is that the combination of a reverse mortgage and an annuity or a reverse mortgage and any financial product for that matter is really only appropriate in cases where it is part of a comprehensive plan put together by a qualified individual who has a fiduciary responsibility to the client.
HANSEN: Bell says reverse mortgages have helped many seniors. The loans don't have to be repaid until the borrower dies, sells the house or moves out permanently. Seniors have used the money to help prevent the foreclosure, pay for costly medical treatments or do needed repair work.
That's why reverse mortgages are so popular. The number of these loans, which are insured by the federal government, has expanded 1,237 percent in the last six years. With that growth has come a rising number of complaints.
Missouri Senator Claire McCaskill chaired a Senate special committee on aging hearing on reverse mortgage abuse in December, and was shocked at what she heard. The Democrat has sponsored legislation to address some of the abuses.
Senator CLAIRE MCCASKILL (Democrat, Missouri): What's going on is fairly outrageous, and it could make the subprime crisis just be the beginning of a real economic issue for our country because of the equity that's really in these homes, I mean, trillions and trillions of dollars of equity that is potentially at risk.
Keep in mind that the taxpayers are on the hook for these loans. And that's one thing that really irritates me is these ridiculous ads that say don't miss this good government benefit. I mean, they're acting like this is Medicare or something, that if you're not taking advantage of this program somehow you're missing out on what you're due from the federal government.
So I think it's one of those deals where the middleman is going to make money but the long-term consequences are the taxpayers of this country. That's why we've got to do something to make sure that we regulate this area more carefully.
HANSEN: McCaskill has another concern: federal law requires seniors to get independent counseling about their reverse mortgage loan before they sign on the dotted line. But McCaskill says the counseling many receive is woefully inadequate and fraught with conflicts of interest because the counselors are often paid by the industry.
Sen. MCCASKILL: We now have the people selling these mortgages. They're providing, supposedly, the independent counseling to the elderly people who are purchasing them because the federal government hasn't provided enough money for the counseling. This counseling should be done by an independent objective third party.
The people who are doing the counseling should never be paid by the people who are going to make the money off closing the loan.
HANSEN: Her bill, which is supported by the reverse mortgage industry, would provide more funding for independent counselors. It also would establish criminal and civil penalties for bundling reverse mortgages with long-term annuities. But those changes will come too late for seniors who've already been victimized.
Ms. ERNESTINE BOACH(ph) (Senior with reverse mortgage): I was so healthy before, now I'm really - I can't sleep anymore with all these financial problems, high blood pressure now and all that.
HANSEN: That's Ernestine Boach. The 67-year-old retiree from Chula Vista, California was persuaded to take on a reverse mortgage she didn't need and invest a chunk of it in a long-term annuity. You lost a lot of money.
Ms. BOACH: I lost a lot of money.
HANSEN: You had to take out a traditional mortgage to - you know, $140,000 to pay back the reverse one. You'd had to sell your annuities at a loss.
Ms. BOACH: Well, yeah, now my daughter and I, we are stuck with a payment of $1,000 for 30 years just to pay back the traditional loan and this money goes nowhere.
HANSEN: And can you afford that?
Ms. BOACH: No, no, I'm in big trouble.
HANSEN: And for Carol Anthony, whom we heard earlier, this is all too familiar. Her mother, Betty Adcock has been physically and emotionally scarred by her experience.
Ms. ANTHONY: My mother has changed since this whole ordeal. The only person she will open the house to - the front door, besides me is the postman that she's known forever.
HANSEN: It must be tough for you, because after all, I mean this is your mom, she was gaining a modicum of independence after your dad died…
Ms. ANTHONY: Mm-hmm.
HANSEN: …and she feels like she blew it and…
Ms. ANTHONY: Yeah.
HANSEN: …you've had to take care of her during this…
Ms. ANTHONY: Yes.
Ms. ANTHONY: Yes.
HANSEN: …and physically…
Ms. ANTHONY: Yes.
HANSEN: …because of her digestive problems.
Ms. ANTHONY: Mm-hmm.
HANSEN: How have you coped?
Ms. ANTHONY: I think a better question was - would be, what did I feel like when my mom was crying?
HANSEN: Yeah, what did you feel?
Ms. ANTHONY: Well, it's something that no child should see, a mom, who's in her 80s absolutely broken and sobbing and calling herself stupid. I really wanted to track the guy down.
Ms. ANTHONY: Mentally, I was so hateful, I wanted to track him down and confront him face to face and ask him why did he do this to a lady who's just a sweet, loving woman who everybody loves and who trusts everyone.
HANSEN: And that kind of trust may be a luxury that many seniors can no longer afford.
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