Continued: Cashing out the nest egg

Vernie Anderson almost fell for the phone pitch. "Turn $30,000 into $90,000 with your own Web page," he was told. A reverse mortgage could get him the cash he needed to start an online business.

But the local banker balked when Anderson asked for the mortgage, knowing his Sebeka, Minn., neighbor, age 82, had never even used a computer. And that quashed any deal. "I was lost through the whole thing," Anderson says now. "I thought they were helping me out."

Reverse mortgages, targeted to older homeowners who may be house-rich but cash poor, are a bright spot in housing loans. With financial markets dry for all but the most stellar borrowers, and 77 million baby boomers crossing into retirement, the once relatively obscure loans are becoming commonplace.

But like many of the once-innocent loans that led to the current housing crunch -- such as adjustable-rate mortgages -- reverse mortgages have a dark side. Indeed consumer advocates hear echoes of the subprime lending crisis that has pressed the country into record foreclosures.

Lenders from the virtually dead subprime market are migrating to reverse-mortgage loans, using the same hard-sell, high-fees tactics that marked the subprime crisis. Many buyers regret the move a year or two later, according to consumer advocates who are working to undo problem loans.

"It's just remarkable how all of this is intertwined," said Dan Williams, who manages financial counseling at Lutheran Social Service of Minnesota in Duluth.

A tenfold increase

Reverse mortgages have grown tenfold since 2001 -- to a $25 billion industry last year, according to the U.S. Department of Housing and Urban Development (HUD). The most common type -- accounting for more than 90 percent these days -- is the Home Equity Conversion Mortgage (HECMs, pronounced "heck-ums"), because they are regulated and insured by HUD.

HUD officials estimate that HECMs account for more than 90 percent of reverse mortgages these days, with their numbers growing from 7,781 in 2001 to 107,558 last year. In Minnesota, they rose from 136 in 2001 to 1,280 last year.

A HECM is available to people 62 and older who have substantial equity in their homes. It's called a "reverse" mortgage because the bank pays money to the homeowners, instead of the other way around -- money that doesn't have to be repaid until they move or die. Homeowners can choose how they want to be paid -- an immediate lump sum, monthly payments, or a line of credit. When the owners or their heirs sell the house, the loan balance is paid off from the proceeds. HUD insures that debt and the interest, making this kind of reverse mortgage particularly appealing to lenders.

National surveys show that many seniors use reverse mortgages to repay an existing conventional mortgage, though Minnesota financial counselors said they're seeing a spike every spring and fall from seniors struggling with rising property taxes.

Senior advocates aren't worried about HECMs themselves, because the government requires seniors considering one to speak with a HUD-certified reverse mortgage counselor. But advocates are worried about tactics that they sometimes see accompany the mortgages.

Cross-selling is the biggest issue, Williams said, and the sales pitches are coming into Minnesota via telephone and Internet from all across the country. He described several versions of cross-selling, which usually involve selling seniors insurance that they don't need. In one example: An insurance broker calls to sell an annuity, a policy that can help some retirees who need more monthly income because it's set up much like an old-style pension. When the seniors say they can't afford that, the broker refers them to a reverse mortgage lender. When handled unscrupulously, this combination of sales can easily cost $20,000 to $30,000.

Another example Williams said he recently encountered: A salesman promises he can sell seniors a reverse mortgage neither they nor their heirs will ever have to repay -- by selling them a life-insurance policy in the amount of the mortgage at the same time to cover the debt when it comes due. That kind of policy carries a single, upfront premium, Williams explained, so again, when handled unscrupulously, those seniors get hit with three, big upfront fees: the mortgage closing costs plus the insurance sales commission and premium.

In a survey of 1,500 reverse mortgage borrowers last year, one in 10 told AARP that they'd been pitched some kind of insurance along with the mortgage. It's such a problem it prompted Congress to specifically forbid a reverse mortgage lender from requiring a senior to buy insurance with the loan. But that's not enough to stop it, said Peter Bell, president of the National Reverse Mortgage Lenders Association in Washington. Bell is particularly concerned by what he sees as an insurance industry abuse and not a reverse mortgage abuse -- which is getting unfairly tainted by it.

Familiar names

High-pressure sales are reminiscent of subprime's growth, consumer advocates said. That makes sense to Williams, who pointed out that two of the biggest reverse mortgage lenders are Financial Freedom -- a subsidiary of IndyMac, the California bank that failed because of risky mortgages -- and Countrywide -- now owned by Bank of America, which had been the country's fourth-largest subprime lender.

HUD's Meg Burns, who administers the HECM program, doesn't see many crossover effects and doesn't expect to. The subprime industry was based on churn -- lots of sales, fast -- and reverse mortgages take time, Burns said.

Still, mortgage counselors said they do see the same hard-sell tactics -- including impatience -- with reverse mortgage lenders. Seniors complain of relentless sales calls. Twin Cities mortgage counselor Bonnie Clark said an agent from Source Lending, in the Twin Cities, called her an "idiot" on the phone one day, because he didn't feel she was counseling one of his potential customers quickly enough. "You can imagine that if they're doing that to me, what they're doing to old people," she said.

Source Lending owner Chris Hacker did not return calls asking for comment, but the brokerage is facing two lawsuits, one from the Minnesota attorney general, both alleging predatory practices with other kinds of mortgages.

Lenders also said that they see problems with HUD-certified counselors. After clients reported informational sessions as short as 10 minutes, HUD now requires a one-hour minimum. And lender Beth Paterson at Reverse Mortgages SIDAC in St. Paul said she has reported one Twin Cities counseling agency five times to HUD for steering its clients to the same lender, against HUD rules because of possible conflicts of interest.

Paterson worries that all the bad news surrounding reverse mortgages will hold back seniors who can benefit from them.

Indeed nearly all of Leonard and Maricarol Mortenson's retirement savings were in their Waconia home, which appreciated in value over 35 years to about $400,000. The Mortensons tried to sell it -- so they could move permanently into a retirement home they were buying near family in Carlos, Minn.-- but they couldn't sell in the bad housing market. That forced Leonard to keep working at a steel job shop until he was almost 70. A reverse mortgage gave them the money they needed to relocate to Carlos until they can sell the Waconia house.

"Len had to retire," Maricarol said. "It was getting to the point he couldn't handle that heavy work and nine-hour days. Without the reverse mortgage we probably would have lost this [Carlos] house. ... It definitely saved us."

H.J. Cummins • 612-673-4671