To Retha Floyd, 95, taking out a reverse mortgage on her home seemed like a sensible way to pay for needed repairs and preserve the house for her descendants.
correction
An earlier version of this story incorrectly stated that since 2009 borrowers have been required to undergo counseling to make sure they understand the loan terms. In fact, counseling had already been required. It was enhanced in 2009.This story has been updated.
Reverse mortgages, also known as home-equity conversions, allow older, cash-strapped homeowners to tap into the equity in their homes while continuing to live in them. Only people 62 or older are eligible. No payments are owed to the lender as long as the homeowner lives in the house, and most are federally insured. The owner continues to pay taxes, insurance and maintenance costs and keeps the title to the home, but once he or she dies, moves out or sells it, the loan and interest must be paid out before any remaining money goes to the estate.
If a borrower fails to keep up with taxes or insurance, he or she goes into default and the mortgage company can foreclose on the house. If a loan is in default, the company is allowed to conduct “drive-by” home inspections to assess the state of the property and verify that the owner is living there. The cost of the inspection – $15 to $20 — is added to the amount of the loan.
While such inspections are generally limited by law to once every 30 days, the suit says, Floyd’s lender, Texas-based Champion Mortgage Co., used automated software to trigger “repeated, unreasonable, and unnecessary” inspections several times a week or even more than once a day and charged hundreds of homeowners in the District and thousands elsewhere in the United States for them.
Champion contracts with a Michigan-based company, Celink, to do the inspections. That company is also named in the suit, which was filed in the U.S. District Court for the District of Columbia by Tycko & Zavareei, the National Consumer Law Center and AARP’s Legal Counsel for the Elderly.
A representative of Champion, also known as Nationstar Mortgage LLC of Delaware, said the company does not comment on litigation matters. Voice and email messages to Celink, also known as Compu-Link Corp., were not returned.
Floyd, a retired school foodservice worker, bought her house in Northeast Washington more than 50 years ago, and three generations of her family were raised in it. It was paid off when, in 1997, she needed money for extensive structural repairs.
“It needed to be fixed or there was a possibility they would condemn the house,” said Tiyease Floyd, her granddaughter, who grew up there. “We didn’t have the money to pay for it.”
When mortgage-company representatives spoke at the senior wellness center Floyd attended, it seemed like a good idea, and the money paid for new gutters, bracing and other work.
But when Floyd fell behind on her property taxes, Champion sued to foreclose on her home. Legal Counsel for the Elderly, an affiliate of AARP, helped her negotiate a repayment plan, and the suit was dismissed in April.
During the process, a lawyer at LCE noticed extra charges in Floyd’s statements. Four times between 2014 and 2015, she had been charged for two or three inspections in one month. The charges mirrored similar ones levied on other reverse-mortgage clients.
It is a subtle way of skimming extra money, said Amy Mix, supervising attorney for the organization’s consumer fraud and financial abuse unit, who noticed Floyd’s charges. Because the mortgages have no monthly payments due, she said, homeowners can easily miss seeing the additional fees.
“You’re sort of at their mercy as to whether they’re following the rules or not,” Mix said. “It would take somebody looking at the statement each month and noticing and knowing that there’s something they can do about it.”
Steve Irwin, executive vice president of the National Reverse Mortgage Lenders Association, said the home inspections are required for borrowers in default to make sure the property is being maintained. He could not comment on this case, but he said the inspections must occur every 30 days at a minimum but that it was his understanding “it can be more.”
Reverse mortgages, once a rarity, boomed in the 2000s during the housing bubble, soaring from 43,000 in 2005 to more than 114,000 in 2009. The number dropped after that but are expected to grow again as more baby boomers become eligible.
Many advocates warn that they should be a last resort because they chip away at equity, leaving less to pass on to heirs. Also, in some cases, younger spouses have removed themselves from deeds in order for an older spouse to qualify, only to find themselves forced out of the house when the older spouse dies.
Recent rule changes — including some introduced this month — build in more protections for consumers, including limiting the amount that can be borrowed if there is a younger spouse; limiting how much can be taken out as a lump sum; reducing interest-rate increases; and ensuring that borrowers have enough money to cover taxes, insurance and upkeep.
Still, many consumers are unaware that reverse mortgages are a loan with interest due, that they are not affiliated with the government and that borrowers can lose their homes if they default, according to a report last year by the Consumer Financial Protection Bureau’s Office for Older Americans.
Since 2009, borrowers have been required to undergo enhanced counseling to make sure they understand the loans.
“Counseling in recent years has been considerably strengthened,” said Amy Ford, director of home-equity initiatives for the National Council on Aging. Prospective borrowers receive a booklet and must answer a certain number of questions correctlyto qualify. The counselors also calculate the homeowners’ specific finances and tell them about alternative financing options.
Floyd is not the kind of person who would dispute a bill from her mortgage company, said her grandson-in-law, Earl Smith.
“In my grandmother’s era, they pay their bills on time – if it says ‘$200,’ they pay $200,” he said. “Our generation, we’re going to research it, but they just go ahead and pay it.”
