Have recent events finished off what the government calls the “white-collar mugging” of elderly people? They’re talking about insurance salespeople who charge huge fees for advising seniors about reverse mortgages.
This game barely got started before the mortgage industry and the U.S. Department of Housing and Urban Development closed ranks to stop it. The lenders and loan servicers won’t handle the clients they bring in.
The leading fee-charging firm is Patriot Inc. of San Juan Capistrano. Patriot’s chief executive officer, insurance agent Jeff Butler, declined to talk. But his attorney, Sharon Babbin of Hillyer & Irwin in Washington, D.C., says there’s “a conspiracy to put Mr. Butler out of business.” She says the firm is contemplating legal action.
The fight has nothing to do with the worthiness of reverse mortgages. They can be a godsend to people in their 70s and up, with meager incomes and paid-up homes.
A reverse mortgage is a loan against the equity seniors have in their homes. Most borrowers open a credit line that they can tap for cash at will. But you might also choose a monthly check or a single lump sum.
You make no repayments on this loan and can stay in your home for life. The lender is reimbursed, plus interest, from the proceeds when the house is sold.
Reverse mortgages are available in every state but Texas. South Dakota, a former holdout, will open its market July 1.
The mass distribution of these loans is pretty new. At present, they’re carried by a limited number of regional and national lenders.
It’s easy to learn who these lenders are. Just call 800-7-FANNIE (Fannie Mae offers reverse mortgages and also buys them from lenders). You can also send $1 and a stamped, self-addressed, business-size envelope to the National Center for Home Equity Conversion (NCHEC), Suite 115, 7373 147th St. W., Apple Valley, Minn. 55124, for a list of lenders and reverse-mortgage counselors that abide by the center’s code of ethics. You can also call HUD’s toll-free information line, 888-466-3487.
But seniors don’t always discover these sources and the average banker has no idea.
Enter the telemarketing industry. Patriot and others solicited seniors for “estate planning” services, touted reverse mortgages, then gave them the mortgage lenders’ names.
Sometimes they drove clients to the lender. They sat in on the mandatory counseling session on reverse mortgages, required by law (seniors have to be told about all their financial options, to try to keep them from being taken advantage of). If the house had to be repaired, the agents might have called a contractor.
In return, they typically charged 8.5 to 10 percent. (Babbin says that percentage was levied on the net loan amount, although the agreements didn’t specify.)
On a $60,000 loan, that’s a $5,100 to $6,000 “service fee,” in addition to all the mortgage-closing costs.
“Outrageous,” says Robert Sahadi, vice president for housing initiatives at Fannie Mae. “We’re trying to minimize the costs and here comes someone adding 8.5 percent on top.”
Because the information provided by these telemarketers is available free, it came as a shock to the industry to find that salespeople were charging for it.
Take Maxine Wittig, a 69-year-old widow in Norwalk, who took a loan after being solicited by an agent for America’s Trust of San Juan Capistrano.
Her total loan was nearly $57,000. After closing costs and other expenses (including roof repair), she netted $42,275.
The agent said the fee was “fifty-five seventy-one,” she told my associate, Kate O’Brien Ahlers, so she wrote a check for $55.71.
“Then he smirked and said it was $5,571,” she says. “I was in total shock. I wrote the check, but my hand was shaking so hard the writing must have been almost illegible.”
Clients of these firms tend to take lump sums rather than credit lines (that’s one reason the agents sit in on the counseling). The agents wheel most of the loan proceeds into an annuity, thereby earning a second commission.
A brochure from America’s Trust, an affiliate of Patriot, solicited agents by touting all the annuities that reverse mortgages could help them sell.
Annuities can be a legitimate choice. But “clients aren’t having all their options or costs laid out carefully,” says NCHEC chief Ken Scholen.
Toward the end of last year, worried lenders started alerting HUD, Fannie Mae and the American Association of Retired Persons about the high fees. In mid-December, Fannie stopped buying the loans brought in by Patriot and similar firms.
Last month, HUD Secretary Andrew Cuomo announced that the Federal Housing Administration’s reverse-mortgage program would no longer accept loans sent its way by firms that “victimize senior citizens.” He named Patriot and some of its affiliates.
Patriot’s Jeff Butler had been sanctioned by California for deceptive and high-pressure sales and lost his license to sell health insurance there in 1995. Babbin says Butler “was a victim” just distributing someone else’s bad product and that clients are happy with his services.
Last week, Cuomo lost a legal action that Patriot brought against him. The U.S. District Court in Washington, D.C., concluded that his executive order exceeded his legal authority. Now, he’s seeking legislation which has wide bipartisan backing. “We’ve already effected what we wanted, we put them out of business,” Cuomo told me. Unless Patriot gets another bright idea.
When the reverse mortgage was designed, everyone agreed industry, government and consumer groups to be especially careful.
These loans are aimed at a potentially vulnerable group: the oldest of the old, with small incomes but substantial cash locked up in their homes.
For example, before taking a reverse mortgage, you have to go through counseling to have all your options explained. Sometimes all you need is money to repair the roof, which may be available through other sources.
If you do borrow, the lender has to figure your Total Annual Loan Cost (TALC). Unlike the interest-rate disclosure on ordinary loans, the TALC includes all related costs.
But slickies always seem to find a way.
Their finder’s fees can “virtually double the cost of getting a loan in some areas,” says Bronwyn Belling, a reverse-mortgage specialist for the American Association of Retired Persons Foundation.
The depredations seem to have been stopped, for now. The reverse-mortgage industry is declining the loans these agents refer to them.
But who knows where the next loophole lies?
Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.